Any loan can be an interest only loan if the borrower can pay only the interest. However, the option to pay interest only lasts for a specified period, usually 5 to 10 years and the borrower can pay more than the interest if he wants to.

Why is an interest only loan beneficial?
1. Lower monthly payments -When you get an interest-only loan, you pay only the interest instead of the principal along with the interest. Hence, the payment burden is substantially lowered. However, you can pay parts of the principal portion of the loan if you choose to.

2. Increase your cash flow -An interest only loan lowers your financial burden substantially. You need to pay only the interest as opposed to traditional mortgages where you pay the principle amount in addition to the interest.

An example: if a 30-year loan of $100,000 at 6.25% is interest only, the required payment is $520.83. Borrowers who have the same mortgage but without an Interest Only option, would have to pay $615.72

When should you opt for an interest only loan?

• If you have a high net worth: in such a case you may not be so much interested in allocating majority of your income in your house, but use the excess money for better returns.
• If there is a potentiality of increasing income: if you are sure of your income to increase substantially, and are looking for greater purchasing power
• If you have plans to move in 3 to 7 years: if you are aware of the time-frame for home ownership and are more concerned with payments rather than paying down principal on the loan during that period of time
• If you are a real estate investor: If you are purchasing investment property, interest only loans can be very valuable when the high real estate appreciation is considered