What type of mortgage allows a borrower to pay only the interest for a certain period?

An interest-only mortgage is a type of loan that permits the borrower to pay only the interest for a specified period, often ranging from 5 to 10 years. During this interest-only phase, the borrower does not pay down the principal amount, which means that monthly payments are reduced compared to a conventional mortgage where both interest and principal are paid.

This type of mortgage can be attractive to borrowers who want lower initial payments or who expect their financial situation to improve in the future. After the interest-only period ends, payments will then increase significantly as the loan transitions to standard amortizing payments that include both principal and interest, which can lead to a substantial payment increase.

Understanding the mechanics of an interest-only mortgage is crucial, as it allows borrowers to leverage their cash flow in the early years of the loan.