By Matt Schaub

With an interest-only loan, you can simply pay the interest. Or you can pay the interest, plus as much of the principal that you decide to pay in any given month. Interest-only loans, which are available for a fixed number of years – and always in the loan’s initial years – may be fixed-rate mortgages or adjustable rate mortgages (ARMs).

This is how they work: in the month that you opt for interest-only, your payment is lower than a principal plus interest payment would have been. This payment flexibility gives you a great deal of control over your personal finances. Many people, recognizing the control of their personal cash flow afforded by an interest-only loan, have decided to refinance from traditional home loans to interest-only loans. For an example of the payment flexibility in such a refinance, let’s take a look at how refinancing a $200,000 traditional mortgage to an interest-only mortgage might work:

$200K @ 5.75% Interest-Only Payment.............$958.00
$200K @ 5.75% Principal and Interest Payment....$1,167.00

Cash flow difference is $209.00 a month.

The Advantages of Interest-Only Refinance