What is an Interest Only Loan?

An Interest Only Loan is a loan or mortgage in which the borrower pays only the interest, no principal, for a period of time. The principal remains constant and doesn’t go down as in a normal loan. After the term of the loan expires, the borrower has to pay off the principal or refinance the loan.

This is a way to borrow a large sum of money without making big payments at first. Some people take out such loans in the expectation that their income will go up over time and they will use this increased income to pay the principal. Or they might take out such a loan in the expectation that the house will go up in value and they can sell it at a profit. This is also used in business financing.