Mortgages with an interest-only option allow you to pay only interest for a certain number of years. All types of loans (fixed rate, adjustable rate) can have an interest only option.

Many people like these loans because they have lower monthly payments. While this is true, it is important to note that your mortgage balance never decreases if you only pay off the interest.

This chart compares two mortgages, a fixed-rate and an interest-only mortgage. The mortgage is for $200,000 and the interest rate is 6.5%.

For the fixed rate mortgage, the payment is $1,264. With an interest-only mortgage, you only pay $1,083.

The monthly payment is lower by almost $200 per month. But, the principal balance that you owe does not decrease. And while that $181 difference may not look like much, it can really add up over time. Usually your interest-only period will expire after a period of time (for example after 10 years). Then your payments can jump up since you will have to pay off the full balance of the loan in 20 years instead of in 30 years. On top of that, your interest rate could go up as well, and you might end up in a difficult situation with much higher payments.

Fixed Rate vs. Interest-Only Mortgage Monthly Payment

Note: estimates are for the first year of the mortgage