Interest-Only Mortgage

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An interest-only mortgage is a mortgage in which you pay only the interest on the loan for the first few years of the loan period, paying none of the principal. The benefit is that because no principal is being repaid, the monthly payments are lower. Typically, payments will eventually convert to the more normal "principal plus interest" repayments. People are attracted to this type of mortgage when they want to keep their monthly payment as low as possible. It also helps if you do not intend to stay in the property for a very long time. A drawback is that you are building up no equity in the property. This means that if the value of the property falls, you may have negative equity, and so when you sell you do not get enough money from the buyer to pay off the mortgage, and you have to pay the difference yourself. There are other potential problems. One is that when the loan converts to "principal plus interest," the monthly payments can increase substantially. Another is that interest-only mortgages are typically adjustable rate mortgage loans,and so increasing interest rates can also drive up the monthly cost. Interest-only loans were once rarely seen, but during the property market boom that started around 2002 many people took out these loans either to buy property they could not otherwise afford, or because they were confident the housing market would remain strong and they could easily resell at a profit. See also Balloon Mortgage, Fixed Rate Mortgage, and Option Mortgage.