The interest-only home loan was widely used during the housing boom of the early to mid 1990s. They were primarily used to lure in home buyers who could not otherwise afford their monthly payments. But this type of loan has some major drawbacks, as well. As the name implies, interest only home loans are loans that include an option of only paying the interest every month.
The principal balance of the loan is paid only when convenient. These loans usually have a fixed or adjustable mortgage rate. Since these loans are higher risk, they usually come with a higher interest rate, even though the payments are lower. The difference is you’re not paying the loan balance down unless you do it voluntarily.
These types of loans are best for short term loans or if you plan on moving within a few years. The risk here like all non-fixed rate loans is that you can’t predict the future and you might be stuck with a non-desirable loan while you wait for the real estate cycle to come back around to gain enough equity to either refinance or sell.