Interest Only:

Let’s start with the fact that technically there is no such thing as an interest-only mortgage. All mortgages, including mortgages structured as interest-only mortgages, eventually require the repayment of all principal as well as the interest, so technically there is no such thing as an “Interest-Only Mortgage.”

What is commonly and somewhat mistakenly referred to as an interest-only mortgage is actually a mortgage with an interest-only method of payment. This type of payment option is available on several different types of mortgages, depending on your lender.

What makes an interest-only mortgage different from other types of mortgages is that the repayment of the loan’s principal is deferred to a later time and is generally due and payable in one lump sum. For the first few years of an interest-only loan, the borrower is required to pay only the interest portion of the normal loan payment and make no payment whatsoever against the principal. At the end of the loan period the full amount of the original loan is then due and payable, typically in a lump sum.

The repayment of the principal of the loan can be handled several different ways. The borrower can repay the principal of the loan from personal funds or from funds provided by friends and family. The borrower may choose to sell the property and pay off the principal from the proceeds of the sale, or the borrower may choose to refinance the property using a more traditional amortized loan at the then-prevalent interest rate