How Interest-Only Mortgages Work

During the interest-only period, each monthly payment covers only the interest accrued on the full balance — principal never declines. The payment equals the loan amount times the monthly rate. When the period ends, the full balance must be repaid over the remaining years, so the payment jumps to the fully amortizing amount shown here.

Payment Shock

The gap between the IO payment and the later amortized payment is the payment shock. With a 30-year mortgage and a 5-year IO period, the difference can be hundreds of dollars a month — plan for it before the amortization clock starts.

Interest Cost

Interest-only terms almost always cost more in total interest than a conventional amortizing loan of the same term, because principal repayment is postponed. Compare both scenarios before choosing.