U.S. Mortgage Index

Interest-only mortgage

Definition

An interest-only mortgage is a loan that, during an interest-only period, requires payments that cover interest but do not reduce principal. Later payments typically change if principal repayment begins.

In plain English

For a stated period, the required payment may be only the interest that accrued. The remaining principal stays the same unless the borrower pays extra. After that period, the loan usually begins amortizing the remaining balance over the time left. This page does not describe a branded GSE product name as the consumer definition.

Technical definition

Consumer glossaries describe interest-only payments as covering interest and not principal. Freddie Mac Initial Interest is a related Guide product label, not this page’s primary meaning.

Why it matters

Payment shock after an interest-only period is a product feature, not a servicing error by itself.

Sources reviewed