Which mortgage type allows a borrower to pay only interest for a certain period before addressing the principal?

Which mortgage type allows a borrower to pay only interest for a certain period before addressing the principal?

• A. Amortized Mortgage
• B. Interest Only Mortgage
• C. Conventional Mortgage
• D. Variable Rate Mortgage

Answer: (B)

An Interest Only Mortgage is specifically designed to enable the borrower to pay only the interest on the loan for an initial period, which typically ranges from five to ten years. During this time, the monthly payments are lower because they do not contribute toward the principal amount of the loan. After the interest-only period concludes, the borrower then begins to pay both principal and interest, which can result in significantly higher monthly payments after the transition. This mortgage structure can provide initial cash flow benefits for the borrower, allowing them to afford a higher loan amount or redirect funds elsewhere. However, it’s crucial to understand that while monthly payments are lower during the interest-only period, the principal balance remains unchanged, which means that eventually, the homeowner will need to address this remaining debt with larger payments once the interest-only phase ends. The other mortgage types mentioned do not follow this structure. An amortized mortgage involves paying off both principal and interest throughout the loan term, a conventional mortgage does not specify interest-only payments and typically follows more standard amortization schedules, and a variable rate mortgage refers to interest rate fluctuations rather than payment structures focused solely on interest.

An Interest Only Mortgage is specifically designed to enable the borrower to pay only the interest on the loan for an initial period, which typically ranges from five to ten years. During this time, the monthly payments are lower because they do not contribute toward the principal amount of the loan. After the interest-only period concludes, the borrower then begins to pay both principal and interest, which can result in significantly higher monthly payments after the transition.

This mortgage structure can provide initial cash flow benefits for the borrower, allowing them to afford a higher loan amount or redirect funds elsewhere. However, it’s crucial to understand that while monthly payments are lower during the interest-only period, the principal balance remains unchanged, which means that eventually, the homeowner will need to address this remaining debt with larger payments once the interest-only phase ends.

The other mortgage types mentioned do not follow this structure. An amortized mortgage involves paying off both principal and interest throughout the loan term, a conventional mortgage does not specify interest-only payments and typically follows more standard amortization schedules, and a variable rate mortgage refers to interest rate fluctuations rather than payment structures focused solely on interest.