How does an interest only mortgage loan work?

Borrowers only pay the interest on the mortgage for a specified number of years for an interest only mortgage loan. Generally, this is a three to 10-year time period. This type of loan is not a long-term solution. Borrowers pay the interest but the amount the borrower owes on their mortgage does not decrease. This loan is ideal for individuals in high-income brackets, young professionals, short-term homeowners, and real-estate investors planning to purchase a home.

After the specified time period is up, a borrower’s monthly payment will begin to increase, even if the monthly rates stay the same. The borrower will not be paying back the principal in addition to the interest each month. The Federal Reserve states that the longer the interest only mortgage period, the higher the monthly payments will be when the interest only period ends.

An interest only mortgage loan is a type of adjustable-rate mortgage. In an article by Bloomberg Businessweek, the option adjustable rate mortgages (ARM) might be the riskiest and most complicated home loan product ever created.

Lenders are required to give borrowers information on each type of adjustable rate mortgage loan the borrowers are interested in. The borrower will have access to information about the index and margin, how the rates are calculated, how often rates can change, limits on changes (caps), examples of how high the borrower’s mortgage payment could be, and other adjustable-rate mortgage features.