Interest Only Mortgages

Interest Only Mortgages

Interest only is a feature that is available with most mortgages. You pay only the interest component on an IO mortgage. You don't pay any principal so your monthly payments are lower, but you do not pay down the loan. In the future, say after 3 or 5 years, interest only loans become fully amortizing i.e. you pay both principal and interest and the monthly payment is higher because the principal has to be paid over a shorter length of time say 27 or 25 years (assuming a 30 year mortgage).

People take interest only mortgages if :

a) They believe home prices will appreciate

b) They want to afford a larger or a more expensive home

c) They don't plan to stay in the house for a long time

d) Believe their cash flows will increase so that they can pay the higher payments when
    these loans become fully amortizing.