Most types of loans require interest on monthly payments. However, some mortgages, home equity loans and other loans allow you to pay only interest for part of your repayment period. Whereas this sort of loan isn't for everyone, some might find them preferable.
Young Workers
Those anticipating a rise in income from entering the workforce or taking a new step in their career can benefit from an interest-only loan. Exclusively paying interest enables borrowers to access money when they need it, then delay principle repayment until a more opportune time.
Confident Investors
If you have a low interest rate and can apply tax deductions to the interest you pay, it can make more sense to pay interest at first and use the extra money to invest. For example, rather than building equity in your home by making principal payments now, you might prefer to invest your money and have it earn a return for you. Later, you can convert the return into home equity by making principal payments, if you can regularly invest at least the amount you would have paid for your mortgage.
Commissioned Employees
If a significant portion of your income is in the form of irregular commissions, an interest-only loan can help you balance out your cash flow. You only have to pay interest so you can make these small payments on months when your income is low. When you do get a commission, you can use the extra money to pay some of the principal balance.
Warning
Interest-only loans cost more in interest than traditional amortized loans. This is because you are not reducing the principal balance during the interest-only period, so your interest cost is the same every month. In contrast, if you make principal payments, you reduce the amount you owe and therefore pay slightly less interest each month. In addition, interest-only mortgages will not build home equity. If your home's market value drops, you will owe more on the home than it is worth, which will make it difficult to sell.
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