What is Interest-Only Mortgage: A mortgage is "interest-only" if the scheduled monthly payment consists of interest only. The payment does not include the principal portion and hence the principal never reduces. The option to pay only the interest does not last for the lifetime of the loan. Interest only option is for anywhere between the first 5 and 10 years of the loan.

Who is this loan for?

• People on tight budget, who are expecting their paychecks to increase soon.
• People who are disciplined to pay principal as and when they can afford.
• People looking for positive cash flow for other more lucrative investments.
• People looking for a quick capital gain.
• People looking for a short term investment. Buy the house, improve, remodel and sell in a couple of years time.

Things to watch before you jump into Interest-only option:

• These are ARM (adjustable rate loans). Hence the payment increases as interest rate increase.
• You may not look like paying Mortgage insurance - someone needs to and it is usually the lender and that will be adjusted on your interest rate!
• The interest only option is not for the life of the loan. After 5 or 10 years depending on the loan you will face a "payment shock". The payment of principal (which had not reduced since the loan was initiated) and interest is right on your face.

* When ARM rates are much lower than FRM rates, shrewd borrowers may take an ARM but make the payment that they would have had to make had they taken an FRM. By paying the balance down faster, the cost imposed by rising rates in the future is reduced. Hence, it is useful to perform scenario analysis based on the assumption that the borrower pays at the FRM rate for as long as that payment is larger than the ARM payment.