As the name suggests, borrowers with interest only mortgages do not have to pay any principal, but instead pay only the monthly interest on their loans. These loans are typically incorporated as part of another type of loan. For instance, a 30 yr fixed may be interest only for the first 10 years. Over the last 20 years of the loan the borrower pays both principal and interest until the loan is paid off. The avantage of these loans is that the initial monthly payments are lower than the payments would be on a similar fixed rate loan. The disadvantage is that once the interest only period has expired, the borrower has to pay higher payments over the remainder of the loan, to make up for the interest only period.
