An interest-only mortgage loan allows an investor to defer principal payments for a predetermined period, generally from three to ten years. During this time period, the borrower pays only interest. After the initial period has ended the loan is re-amortized in order to pay off the principal over the remaining years. At this point, the investor has a few of options: pay the increased payment, refinance the loan, or sell the property.
Example: 30 year interest only loan on $100,000 at an interest rate of 7.0%:
• Interest only payment: $583/month, $7,000/year
• Conventional payment: $665.30/month, $7,984/year
• Savings over the first ten years: $82/month, $984/year