The majority of mortgages have a monthly payment that includes some portion of principal and interest. Interest only mortgages are different. For a specific period of time (typically 5 to 10 years), you will only pay toward the interest on your loan. During this time period, the principal balance on your loan will remain the same and you will not be paying down your mortgage, but your payments will be much lower.
interest only mortgages have advantages, including the ability to buy a more expensive home than you could afford with a typical home loan.
You may want to consider an interest only mortgage if...
While an interest only loan can be a good option for some home buyers, there are downsides to this loan program. It is very important to understand ahead of time that an interest only mortgage will not amortize. This means you can be underwater very fast if home prices in your area fall. You may counteract this by putting down a larger down payment, which gives you instant equity and a buffer if prices fall.
You should also be comfortable with the fact that your monthly payments will go up when your interest-only period comes to an end. You should have the means to afford the larger mortgage payment once principal is included, and realize that you risk not being able to refinance your loan if home prices fall and you do not have equity.
Interest only mortgages were very popular prior to the recession, although they remain popular with well-qualified buyers in certain situations. New mortgage rules that went into effect at the start of 2014 have impacted loan options, and these rules have made it harder to find interest only home loans which cannot be considered a Qualified Mortgage under these rules. Loans that meet QM status offer lenders protection if borrowers default, so you should be prepared to provide a large down payment and show sizable assets to get approved today.