An interest-only mortgage is a loan where the borrower’s monthly payments are made up of only payments against interest. The interest-only mortgage allows you to have lower-than-normal monthly payments for the first five or 10 years of your mortgage. After that pre-designated period, you will pay interest payments along with payments against the principle of your home.

When you want to pay your principle amounts when it’s convenient

An interest-only mortgage is a great option for someone who has fluctuating income levels. With an interest-only mortgage, you can pay your monthly interest payment each month. Then, when you have higher-income months, you can pay against the principle balance of your home, too.

What if you want to buy a house that is bigger than you can afford otherwise?

The interest-only mortgage is beneficial to those who want a larger, nicer home than they truly can otherwise afford. The interest-only mortgage works for the homeowner who needs a more expensive home than he or she can afford but is only planning on living in the home for a few years (before the normal, higher monthly payments kick in) or who is anticipating earning more money in the foreseeable future. If you earn more money in five years, you’ll then be able to afford the higher monthly payments that will be due at that time. However, this can be very risky. If the real estate market takes a downturn you can easily get "upside down" in your home without the cushion of equity that you would have built up if you had made regular, fixed rate payments.

When you want to invest your money in something other than your home

The interest-only mortgage is also a terrific option for those who want to invest their money in something other than the equity of their home. If you are achieving high returns on your money investments somewhere other than the money you’re putting into your home, you may want to make lower, interest-only payments to your lender, then pay more money each month toward your investment portfolio.