Interest Only mortgages present a number of advantages to the real estate buyer, and have been increasing in popularity in recent years. This type of real estate loan allows the borrower to pay a monthly amount that is temporarily lower than what he would be paying for a traditional 30-year fixed mortgage. This lower payment is granted for a specified number of years, most commonly between one and five, and consist of only interest to the lender. Not one cent of the borrowers monthly payments during the initial period will go towards reducing the principle balance.
At the end of the Interest Only period, the lender will increase the amount of the monthly payment to include principle as well as interest. When this point in the contract is reached, the borrower's monthly payment will typically be even higher than if he had originally obtained a standard 30-year fixed loan, and this is because he now has several years less to pay back the same amount of money .
Interest Only loans are not for everyone, and are most commonly attractive to borrowers who are certain that they will be selling the property before the end of the interest only period. The best situation is one in which the property value is also increasing at a consistent and steady rate, because the borrower still owes the entire original principal balance. If real estate values are not increasing, the seller will see no profit because his loan payments have not reduced his outstanding balance to the mortgage company.