Interest Only Mortgage

Example

“With an interest-only mortgage, Sarah paid $2,100 monthly for the first five years, but none of that reduced her $350,000 principal balance.”

Memory Tip

Think 'interest ONLY' like eating ONLY dessert - it's sweet at first because payments are lower, but you're not getting the nutrition of paying down principal.

Why It Matters

Interest-only mortgages can provide lower initial payments, helping buyers afford more expensive properties or preserve cash flow, but they result in no equity building during the interest-only period and higher payments later. They require careful financial planning to avoid payment shock.

Common Misconception

Borrowers often think interest-only mortgages will always have low payments, but payments can increase dramatically when the interest-only period ends and principal payments begin.

In Practice

A borrower takes a $400,000 interest-only mortgage at 5% with payments of $1,667 monthly for seven years, but after that period, payments jump to approximately $2,400 monthly when principal payments begin.

Etymology

Combines 'interesse' (Latin for 'it matters') with 'mort' (French for 'death') and 'gage' (pledge), creating a 'death pledge' where initially only the cost that matters is paid.

Common Misspellings

More in financing

Other financing terms you should know