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The borrower pays only the interest on the principal balance without changing it for a set term in the interest only pay loan. The borrower may enter an interest only mortgage, pay the principal or convert the loan to a principal and interest payment loan at his/her option at the end of the interest only term.
A five or ten year interest only period is typical in the United States. The principal balance is amortized for the remaining term after this time. For example if a borrower had a thirty year mortgage loan and the first ten years were interest only, at the end of first ten years, the principal balance would be amortized for the remaining period of twenty years.


The result is that the early payments are substantially lower than the later payments. As a result the borrower feels more flexibility. It enables a borrower who expects to increase his salary. Then he would have otherwise been able to afford or investors to generate cash flow. n the interest only years unless the borrower makes additional payments towards principal the loan balance will not decrease.
This loan represents a higher risk for lenders and a slightly higher interest rate. The adjustable rate variety of interest only mortgages is sometimes indicative of a buyer taking on too much risk. And it is happened when a buyer is unlikely to qualify under more conservative loan structures. A homeowner may be adversely affected by prevailing market conditions at the time he is either ready to sell the house or refinance as he does not build any equity in an interest only loan.