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With interest only loans mortgage companies are granting you a lot of liberty with their money. You the money upfront and then you only have to pay the interest on the loan each month. During the term of the loan, none of your payment goes towards paying off the balance unless you make a higher payment than you are required to pay. At the end of the term, a balloon payment is due in the amount of the entire loan balance. So if you had a $200,000 loan, you will have to pay $200,000 as your last payment. Here are a few ways that these types of loans are typically resolved.
Refinance
Refinancing is one of the most common ways that these loans are resolved. When you get down towards the end of the term, you can get another loan to pay off your existing one. This will allow you to avoid the balloon payment and eliminate the interest only mortgage.
Selling the House
Another common way that these loans are resolved is when you sell the house. Selling the house can provide the money to pay off the mortgage and get rid of the interest only mortgage.
