What is an Interest-Only Mortgage?
An interest-only mortgage is a type of loan where the borrower is only required to pay the interest on the loan for a set period, typically 5 to 10 years. During this time, the principal balance does not decrease unless you choose to make extra payments.
Once the interest-only period ends, the loan "recasts," and your monthly payments will increase significantly as you begin paying both principal and interest over the remaining term of the loan.
Pros and Cons
The primary advantage is lower initial monthly payments, which can help with cash flow. However, the downside is that you aren't building equity through your monthly payments, and you face a much higher payment later on.