An "Interest Only" mortgage is a type of home loan where the borrower is required to pay only the interest on the principal balance for a specified period, usually between five to ten years. This means that the monthly payments during this period cover only the interest accrued on the loan and do not reduce the principal balance.

Interest Only loans are available on both fixed-rate and adjustable-rate mortgages, as well as on option ARMs. These loans typically have lower initial monthly payments compared to fully amortizing loans, which include both principal and interest payments. However, once the interest-only period ends, the borrower must begin making fully amortized payments, which include both the principal and interest. This often results in a significant increase in the monthly payment amount.

During the interest-only period, borrowers do not build equity in their homes since they are not reducing the principal balance. However, this feature can allow borrowers to afford more expensive homes or allocate funds to other investments.

For example, if a borrower takes out a $250,000 mortgage at a 6% interest rate for 30 years, their monthly payment would be $1,499. If the same borrower opts for a 5-year interest-only period on the same loan, their initial monthly payment would be $1,250. This lower payment can provide short-term savings, but once the interest-only period ends, the monthly payment would increase to $1,611, resulting in a higher overall cost over the life of the loan.

Despite the potential cost savings in the short term, interest-only mortgages may not be suitable for all borrowers. It is important for borrowers to carefully consider their financial situation and long-term goals before opting for an interest-only mortgage.