Interest Only Mortgage (IO)An ‘interest only’ loan is one in which the monthly mortgage payment pays just the ‘interest’ due on a loan. The payment does not include a portion for repayment of principal. Interest only loans, then, do not amortize; these IO do not ‘kill itself’ by liquidating each month a portion of the principal balance. Only Loans have a fixed and definite time period. In home loans these fixed periods may be 3, 5, 7, or 10 years. During the Interest Only period, the loan balance remains unchanged. A loan that is interest-only during the term specified obviously does not amortize. At the end of the term, a balance owing on the loan would be the same loan amount as it was at the beginning of the loan. A mortgage is “interest-only” if the scheduled monthly mortgage payment-the payment the borrower is required to make-consists of interest only. The option to pay interest only lasts for a specified period, usually 5-to 10 years. Borrowers have the right to pay more than interest if they want to. If the borrower exercises the interest-only option every month during the interest-only period, the payment will not include any repayment of principal. The result is that the loan balance will remain unchanged. Interest Only Mortgage Example
If the borrower exercises the interest-only option every month during the interest-only period, the payment will not include any repayment of principal.
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