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    Question ID:   3112         Current Version: 1
Question: What is an interest-only (I-O) mortgage payment?
Category: Business & Finance > Renting & Real Estate
Keywords: interest-only, I-O, interest, only, mortgage, loan, payment
Type: what
Rating:(0 ratings)    Views: 401    Discussions: 0   In Watch Lists: 1  

 
    Answer:
Traditional mortgages require that each month you pay back some of the money you borrowed (the principal) plus the interest on that money. The principal you owe on your mortgage decreases over the term of the loan. In contrast, an interest-only (I-O) payment plan allows you to pay only the interest for a specified number of years. After that, you must repay both the principal and the interest.

Most mortgages that offer an I-O payment plan have adjustable interest rates, which means that the interest rate and monthly payment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years, depending on the terms of your loan. For example, a 5/1 ARM has a fixed interest rate for the first 5 years; after that, the rate can change once a year (the "1" in 5/1) during the rest of the loan.

The I-O payment period is typically between 3 and 10 years. After that, your monthly payment will increase--even if interest rates stay the same--because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan with a 5-year I-O payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years. Because you begin to pay back the principal, your payments increase after year 5.

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    More Readings :
[QID:3134]    What should I keep in mind when it comes to an interest-only mortgage payment or a payment-option ARM?  
[QID:3114]    What are the risks with interest-only (I-O) mortgage payments and payment-option ARMs?  
[QID:3135]    Does the type of loan and loan payment plan make much difference?  
[QID:1605]    How much of a mortgage can you afford?  
[QID:1603]    What kind of property can you buy with a low down payment loan?  
[QID:1601]    How to qualify for a low down payment loan?  
[QID:1588]    What makes a low down payment possible?  
[QID:3113]    What is a payment-option adjustable-rate mortgage (ARM)?  
[QID:1899]    How cancellation of private mortgage insurance may save you hundreds of dollars each year?  
[QID:1898]    What should I do if I have trouble making my mortgage payments?  
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