AEM Mortgage Minute with Deanna Daughhetee

When you borrow money for something-a house, for instance-you’re expected to pay the money back on a monthly schedule, plus interest. With a typical home loan, your monthly payment would be applied to both the amount you borrowed (the principal) and your finance charge (the interest). With an interest-only loan, however, you have the option to pay only the interest charge each month-and nothing toward the principal balance.

The benefits are obvious: For a set period of time, you have a lower monthly payment, freeing up for other purposes the money that would normally go toward paying off the principal. This could allow you to afford more home for less money or give you the chance to invest your monthly savings elsewhere.

Of course, you can’t go on making interest-only payments forever. At the end of the interest-only period, your loan will revert to more traditional terms, with your monthly payments adjusted upward to start paying off your principal balance. And, in order to make up for the time when you were not paying on your principal, your new monthly payments will be higher than if you had started with a traditional loan in the first place. (For instance, following a five-year interest-only loan, a 30-year mortgage would fully amortize in just 25 years.)