Interest-only mortgages are rapidly gaining popularity for several reasons. The primary appeal is a low monthly payment. Borrowers pay only the interest on the loan for a set period of time; no principal is repaid for up to 10 years. Tied to a low interest rate, the initial lowest mortgage payments in turn result in greater purchasing power. Other advantages include increased cash flow and tax benefits*. Some lenders offer several variations of interest-only loans with a wide range of terms, and features can include no negative amortization, no prepayment penalty, stated income documentation, and pledged assets in place of a down payment.

This type of loan can make sense for borrowers seeking the lowest mortgage payments or seeking to maximize liquidity. In the first scenario, the lower monthly payments can enable you to make the lowest mortgage payments on a home they couldn’t otherwise afford. Those who fall into the latter category are typically wealthier clients with complex financial positions. Benefiting in two ways, such investors can profit from a home’s appreciation while additionally reinvesting elsewhere money that would typically be spent on principal. Interest-only loans can also be an affordable and practical solution for people who plan to sell or refinance their home within a few years.

Potential interest only loan cons include no payment being made towards mortgage principal, meaning the mortgage loan is never paid off. Other interest only loan cons are that when the initial interest only period ends, the borrower may have to pay larger fully amortized payments.

With an interest-only loan, borrowers have the option of paying more than the minimum required payment and applying it towards the principal. This reduces the current payment and future fully amortized monthly payments.

Example of typical conventional 30-year loan vs. interest-only loan:

*Monthly adjustable interest-only payments for first 10 years, plus monthly principal and interest payments of $4,678 for 20 years.