Interest-Only Mortgage Payments and Payment-Option ARMs
Be sure you understand the loan terms and the risks youface. And be realistic about whether you can handle futurepayment increases. If you’re not comfortable with these risks,ask about another loan product.
What is an I-O mortgage payment?
Traditional mortgages require that each month you pay backsome of the money you borrowed (the principal) plus the inter-est on that money. The principal you owe on your mortgagedecreases over the term of the loan. In contrast, an I-O paymentplan allows you to pay only the interest for a speciﬁed numberof years. After that, you must repay both the principal and theinterest.Most mortgages that offer an I-O payment plan have adjustableinterest rates, which means that the interest rate and monthlypayment 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 ARMhas a ﬁxed interest rate for the ﬁrst 5 years; after that, the ratecan change once a year (the “1” in 5/1) during the rest of theloan. More information on ARMs is available in the FederalReserve Board’s
Consumer Handbook on Adjustable Rate Mortgages
.The I-O payment period is typically between 3 and 10 years.After that, your monthly payment will increase—even if interestrates stay the same—because you must pay back the principal aswell as the interest. For example, if you take out a 30-year mort-gage loan with a 5-year I-O payment period, you can pay onlyinterest for 5 years and then both principal and interest over thenext 25 years. Because you begin to pay back the principal, yourpayments increase after year 5.