Interest Only Period

An interest only period is a period of time during which you’ll only pay interest on a loan. You do not repay any of the original loan balance (or principal), so you owe the same amount of money at the beginning of an interest only period as you do at the end.

In other words, there is no amortization during an interest only period.

• How Amortization Works

Interest only periods can be found in fixed rate mortgages and adjustable rate mortgages (ARMs). They may last from 3 to 20 years. After the interest only period, you must include principal payments with each payment, or you have to repay the loan (which could happen through refinancing).

• Mortgage Refinancing Basics

Longer interest only periods increase the risk of "payment shock", where required payments dramatically jump to levels you can't afford. The longer you wait, the larger your required payment will be once you have to repay principal.