Question: How do interest only mortgages work and what is the catch? have been quoted 7.25% on a 30-mortgage on a fixed rate basis. Also was quoted 6.375% on a 30-year interest only payment schedule. Although this reduces the monthly payment, how does this pay off a mortgage? Does this require additional payments to reduce the principal?

Answer: An interest only mortgage does exactly what it says - pays only the interest. For example a $100,000 loan @ 6% interest only for 30 years = a payment of $500. If you were paying a conventional 30 year mortgage the payment would be $600. 100 would go towards paying down the loan. The only way to pay down the mortgage is to pay extra each month or make and extra payment during the year. Now, I.O. (interest only) loan have a lot of benefit if you don't plan on staying in the house for a long time, for example and investor or someone looking to move in the future. The reason for this is because even though you are not paying down the mortgage you are still building equity on your house and only paying the minimum payment to stay in it till you sell it. Hope this helps.
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