As time progresses, the interest due each month should fall as a percentage of the monthly payment, with more money going toward reducing the principal.
If a borrower has signs on for an "interest-only" mortgage, the entire monthly payment will only be covering the interest due on the loan, with a balloon payment expected to pay down the entire principle amount at the very end. These types of mortgages are entered into with the expectation of being able to refinance the entire loan before the balloon payment is due.
As long as real estate prices are rising, this model works well as there will be equity value built up in the home, which can be accessed when refinancing the debt. If, however, real estate prices are flat or falling, then the option to refinance won't be available, and the borrower may face foreclosure of the home or a balloon payment that they may not be able to afford.
Investment dictionary. Academic. 2012.
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