An interest only financing can be defined as one in which you have the option of paying only the interest (or just the interest and a portion of the principal) each month in the early years of the mortgage loan. Furthermore interest only periods may be applied to adjustable rate mortgages, or 30 year fixed rate mortgages, depending on the lender.

On the other hand in a traditional mortgage, each month your mortgage payment is divided in two parts - one part is paid on the interest only financing charge, the other on the principal of the loan. The main advantage of an interest only mortgage loan is that during a specified initial period of time - usually three, five, seven or ten years - you may choose to make a payment of the interest portion of the loan only. The option is flexible to say the least. One month you may opt for making an interest only payment, another you may choose to make an interest-plus-part-of-the-principal mortgage payment, or a full, standard monthly mortgage payment. Taking all this into perspective, an interest-only payment will be significantly less than a traditional mortgage payment.

Theoretically speaking the flexibility of an interest-only mortgage allows you to adjust your mortgage cost on a month-by-month basis, giving you more control over your monthly cash flow. For example in any given month during the interest-only period, you have the flexibility to pay as much or as little on your mortgage as you can.

Interest only financing aren't perfect for everyone. While you have the choice of paying interest only each month during the early years, the principal repayment

on your mortgage loan is accumulating. Moreover at the end of your interest only period, your mortgage payment will take a dramatic jump. Financial experts thats why recommend interest only mortgages for specific types of borrowers: those whose income is supplemented by large commissions or bonuses throughout the year, those who can reasonably expect to be making considerably more income in a few years than they are now, and those borrowers who actually WILL invest the difference between their interest-only payment and their full mortgage payment in profitable investments.

The benefit of an interest only financing loan, according to most experts, is that you can 'afford to buy more house'. Because you'll have the option during the early years of paying only the interest each month, you can effectively afford the monthly payments on a house that's as much as 30% more expensive than you could with an amortizing (typical) mortgage payment.

You also, though, have the option each month of paying the interest plus as much on the principal as you wish. And thats where if you're a salesman, for instance, whose standard income is supplemented quarterly and semi-annually by large commissions or bonuses, you could pay interest-only during lean months, saving yourself up to $350 in those months. In the months that you get a big commission however, you could choose to pay down several thousand dollars on the principal.

An interest only financing also makes quite a lot of sense if you have a solid investment plan. In case if a typical mortgage payment would be $900 monthly, and your interest-only payment for the month is $625, then the best financial strategy according to many financial experts is to invest the remaining $275 in a solid, money-making stocks program.

As mentioned above interest only loans are not for everyone, but they can be a valuable financial tool that can help you control your spending and give your investment power some added oomph. But it is quite important that you don't rush blindly into an interest only mortgage, but do speak to a financial expert or loan officer about whether an interest only loan may be right for you.

In other word interest only loans are loans that give you an option to pay just the interest on the loan for a limited period of time. In addition it also gives the option of paying the interest plus as much of the principal you want. The main plus point of this loan is the lower interest you pay each month. They also play a crucial role in helping to considerably control the monthly payment and cash flow each month. After the starting period, the repayments are raised to fully amortized levels. Whats more these loans also allow for a large principal prepayment if desired. Furthermore interest only loans can be fixed-rate mortgages or adjustable-rate mortgages.

On the other hand interest only loans of longer terms, say 30 years, are especially useful since the extra money that goes as repayment of the principal can be invested elsewhere for a higher rate of interest. Or, as a matter of fact it can be used to repay higher interest debts like credit cards. They are also a perfect idea for people who have taken interest only loans on houses they dont plan on staying in for more than 10 years. This would give them an option to pay just the interest as long as they are in the house and then repay the loan when they are moving out. More often than not the extra money can be used for meeting unexpected expenses or to finance home improvements. They are a ideal choice for people who are expecting an increase in their income; people whose income is based on bonuses and commissions, and people who invest their savings on interest-only loans.

Statistically interest rates on interest only loans range from 5.875% for a 30-year VA fixed, 5.500% for a FHA 1 year ARM, 5.750% for a FHA 30-year fixed, 7.125% for a 5/1 ARM, 6.875% for a 7-year Balloon and 6.625% for a 30-year fixed. Note that this is all susceptible to change.

Though, interest only loans can be risky, since the interest rate may increase after the initial period; the house may lose its value; there may be change in the future income flow, or you may not be able to pay the mortgage for any reason.