Better Know Your Loans: What is an Interest Only Loan?

An interest-only mortgage is a loan that requires you to do exactly what is says: pay off the interest…only.

The advantages to this loan can be found in lower monthly payments, since you’re not paying off your capital in addition to the interest.

This payment plan allows for homeowners to net more income while paying down the interest, however, it does require the homeowner to pay off the entire loan amount (not interest) when the terms come to an end.

This particular loan is common for homebuyers who may have money tied up in investments, trust accounts, savings accounts, or other financial means that “lock” money for a determined amount of time, which shows the money is “there” but unable to be used toward the principle of the loan. You’ll likely be asked to prove you can and/or will be able to pay off the entirety of the loan by the time the terms end.

As is the case with most loans, you’ll want to speak with a mortgage professional to determine the best option for you. If you’d like some recommendations, don’t hesitate to ask.