“Interest only” loans are becoming increasingly popular and so it is important to understand exactly how they work.
An “interest only loan” allows a person to pay a lower monthly payment at the beginning of the loan in order to save money (or to anticipate a larger salary) so that a higher monthly payment is more affordable later in the loan.
Scroll down for an example.

Example:

Using the above calculator, let’s input that we are borrowing $250,000 at 7% interest rate for 30 years. (We’ll say the “interest only period” of this loan will be 5 years).
After clicking “CALCULATE”, we see that the standard mortgage payment is $1,663.26 per month and the “interest only” monthly payment is $1,458.33 which is $204.93 lower.
After 5 years, the standard mortgage payment total is $99,795.60 and the 5 year “interest only” payment total is $87,499.80, saving us $12,295.80 when using the interest only mortgage.
But is this savings worth it?

Actually, this leaves you with two big drawbacks:
1) After 5 years of interest only payments, you have absolutely zero equity in your house. To put this in plain English, after 5 years, how much of your house is actually yours?
Absolutely nothing.
2) After you have enjoyed 5 years of “saving” $12,295.80, you make up for this for the next 25 years with a monthly payment that is now $103.69 higher ($1,766.95 minus $1,663.26) than the standard payment.
To sum up, in this case, the interest only mortgage costs $18,811.20 more ($617,584.80 minus $598,773.60) than the standard mortgage.
That $18,811.20 is the price you pay for the five years of lower mortgage payments.
This higher 30 year total is something to consider if you are thinking of getting an interest only mortgage.