An interest only loan is a loan in which, for a set term, the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest only term the borrower may enter an interest only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.

An interest only loan is a good means of either increasing your home purchasing power or maximizing your flexibility to control cash flow. You can save a significant amount of cash for investment, savings, or other expenditures during the first ten years of your interest only mortgage loan.

Interest only loans are also a solid strategy to maximize tax deductibility, with more funds available for paying down higher cost, non-deductible consumer debt. With these loans, the minimum payment required covers interest only. You, the borrower, decide how much or how little of the principal to repay each month.

With an interest only loan, home buyers typically decide on a monthly mortgage payment that they feel comfortable with and either qualify for more home, or have more cash in reserve for investment, paying down higher-cost debt, or making home improvements.