Interest only loans are loans that give you an option to pay just the interest on the loan for an initial period of repayment, say 5 years or 10 years. It also gives the option of paying the interest plus as much principal as you want.

There are many advantages of interest only loans. They offer flexibility to repay as much principle as you want. The amount that is not repaid as principle every month can be reinvested elsewhere at higher returns. The returns can be used to pay off the loan when the loan is amortized after the interest-only period. Or, it can be used to pay off another mortgage or a high interest debt like credit cards. Another advantage is the lower initial payment enables you to qualify for a higher loan amount or another loan.

Interest only loans are suitable for people who are expecting an increase in the income in coming years, and for people whose income is in the form of indefinite bonuses and commissions. It is also good for people who invest the savings made on interest-only loans properly.

However, there are also some risks involved with interest only loans. The interest rate may go up considerably after the interest-only period, significantly increasing the payments to be. This is because most interest only loans are based on adjustable rate mortgages. Another possible risk is people trying to sell the home they mortgaged to repay the loan. The price of the house may not appreciate as much as expected, or it may even come down in value, making the sale and repayment difficult. Loss of income, slump in the economy and other unexpected contingencies are also some things to be considered while going for an interest only loan.