Definition: In an interest-only loan, or interest-only mortgage, the borrower only pays interest each month. This makes it cheaper than a
conventional mortgage, in which part of each month's payment goes towards the principal and part goes towards interest. These loans had become popular because the monthly payments are lower, allowing borrowers to afford a larger home.
Interest-only mortgages became dangerous, especially in the down housing market. The interest rates are generally fixed for the first 1, 3 or 5 years. After that, they convert to a conventional loan, with a higher monthly payment.
Most borrowers took on these loans because they assumed they would sell the home before the interest rates increased. In the down market, they weren't able to sell. When they couldn't afford the increased payment, many defaulted on the mortgage, and foreclosed on the home.
Also Known As: interest-only mortgage, exotic loans, exotic mortgages, subprime loan
Alternate Spellings: interest only loan
Examples: Unfortunately, many borrowers with interest-only loans or interest-only mortgage cannot afford the higher payment when the loan converts to a conventional loan.
