Normally, your monthly payments do not include anything to be paid towards the principal during the interest-only period of your mortgage. On the one hand, it makes these payments lower; on the other hand, when the interest-only period is over you have to face the debt you borrowed years ago in its full size again, only now you have a shorter period of time to repay it. That is why it is strongly recommended to make voluntary extra payments towards the principal during the interest-only period, if your lender allows you to. If he does, make sure the outstanding balance gets adjusted immediately after an extra payment is made. Sometimes a special arrangement for extra payments during the interest-only period is included into the mortgage contract. If you are only planning to take out an interest-only mortgage and intend to make extra payments, pay special attention to these details in your contract. The problem is that many lenders do not adjust the balance during the interest-only period at all, with or without extra payments, unless stated explicitly otherwise in the contract. If the balance gets adjusted (becomes smaller), the amount paid as interest (percentage of the outstanding balance) becomes smaller, too. This way your monthly interest-only payments become even lower (provided the rate is unchanged or drops). If the first adjustment will take place only after the interest-only period is over, all the monthly payments during the interest-only period remain unaltered. It does not mean that you will eventually pay more as interest, though. Everything will be recalculated, your extra payments, as well as the overpaid interest, will be subtracted from the balance, when the time comes. The tricky part here lies in the investment opportunities available to you at the time of your extra payments. It may so happen that an alternative investment would have brought you a better return, if you had invested into it, rather than the mortgage, whose return you will see only in a few years.

For more on Interest-Only Mortgages read here.

You have to analyze, what exactly your period payment consists of. The two biggest parts are the principal and the interest. In the early years they will very likely be accompanied by PMI. Under other circumstances unchanged, reducing any of these three components will result is a lower monthly payment.

First of all, PMI has to be terminated as soon as the outstanding balance hits the 80% of the purchase (or recently appreciated) price of your property. If you are ready to wait that long, that is. Going down from, say, 90% to 80% can take over 10-years! Terminating the insurance is not an easy business either, but when you do manage to get rid of it, you will immediately feel the difference. Read about the troubles and tribulations involved in my special article.

The amount paid towards the interest is a percentage of the outstanding balance (the principal). The lower the balance, the lower the interest payments. If your mortgage carries no principal prepayment penalties (any more), the most effective way to reduce the balance faster is extra payments. Yes, they may cause you some temporal inconvenience, but they do pay off. Simply calculate how much you can afford to invest into an extra payment (one or several) without depriving yourself of too many joys of life, and see how much it will reduce your monthly financial burden.

Cutting the principal part of the monthly payments down is not really recommended as it will slow down the process of the mortgage debt repayment. If you are desperate, you can try to refinance into an interest-only mortgage (your monthly payment will include no principal part at all for a certain period of time) or into a longer-term mortgage. Say, you have 10 years left on your current mortgage and you refinance for the same outstanding amount into a 30-year mortgage. The same sum gets stretched over a longer period of time and thus each monthly payment is lower. However, all other conditions of the new mortgage have to be favorable. This way also requires some cash, for refinancing is not cheap.