What is a key feature of an interest-only mortgage?

An interest-only mortgage allows borrowers to pay solely the interest on the loan for a specified period, which is typically a few years. During this time, the principal balance of the loan remains unchanged, meaning that the total amount owed does not decrease. This can be appealing to borrowers who prefer lower monthly payments initially, as they only need to cover the interest. After the interest-only period ends, borrowers will start to pay both principal and interest, which can lead to significantly higher monthly payments if they haven’t budgeted for that transition.

This feature distinguishes it from other types of mortgages, such as those where both principal and interest are paid every month, leading to a gradual decrease in total loan amount. While down payment requirements and interest rate structures can vary based on lenders and mortgage terms, the defining characteristic of an interest-only mortgage is the arrangement of payment during the initial borrowing period.