Are prepayment penalties applicable to Interest Only Loans? How does prepayment penalty work?
Interest Only loans usually do not have prepayment penalties. This is because prepayment penalties prevent consumers from capturing still lower rates and terms as markets change. However, whether you would have to pay prepayment penalty will depend on your particular application profile and the lender you choose. You may be able to save up to 0.25% on the rate just by taking a prepayment penalty for the first 3 years.

What is the difference between “Interest only Loans” same as “Balloon Mortgages”?
Most interest only loans are different from balloon type mortgages. Balloon mortgages have a longer initial fixed period such as the 3, 5, 7, and 10-year programs. Moreover, balloon mortgages do not have the note due and are payable at the end of the fixed term. Simply speaking, a balloon mortgage simply transforms into a fully amortized loan. For example, your balance (after 5 years on a 5 year fixed interest only loan) will be amortized over the remaining 25 years, same as a normal 25-year “principal and interest” mortgage would be except at an adjustable rate.

Can I convert an “Interest only loan” to a fixed rate?
Most interest only” loans do not have fixed rate conversion options.

What happens to the loan margin after the fixed term is over?
A loan margin depends on the final product selected. Typically, the loan margin is inversely proportional to the index. This, although tends to balance out various loans utilizing different indexes.

As far as your loan is concerned, once your initial fixed rate period is over, you will be subject to the measured index of your mortgage product and a pre-defined margin based on the lender's mortgage note.