What is an "interest-only mortgage"?

An interest-only mortgage is precisely characterized by the option that allows borrowers to pay only the interest for a specific period. This type of mortgage is designed to provide lower initial payments since the borrower is not required to make principal payments during the interest-only phase.

In the initial years of the loan, the payments made by the borrower cover only the interest accrued on the loan balance, thus providing some financial flexibility. However, after this interest-only period ends, the borrower must start making larger payments, which will now include both principal and interest, typically resulting in a significant increase in the payment amount.

Understanding this structure is crucial for borrowers as it can affect their long-term financial planning and the total cost of the mortgage over its lifespan. The other options do not accurately describe the mechanics of an interest-only mortgage, focusing instead on different types of loan arrangements or payment structures.