An interest only ARM only requires individuals to make monthly interest payments. Since mortgage holders are not paying any principal like with a fixed rate mortgage or a fully amortizing ARM, monthly payments are lower. However, since the principal balance is not decreased, a balloon payment will be due at the end of the mortgage's term. Like a fully amortizing ARM, an interest only ARM will often have a period where the interest rate is fixed and then it can be adjusted annually. An interest only ARM will also have a maximum interest rate that it will not exceed. The ARM vs. Fixed Rate Mortgage calculator caps the interest rate at 12%.
