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Interest only loan is a non-amortized loan where interest is due at regular intervals and the full principal of the loan is due on maturity. An interest only loan lets the borrower pay smaller amounts at the beginning of the loan which usually only reduces the interest balance and has no effect on the principal loan amount. This smaller monthly payment in the beginning allows the borrower to save money in order to pay the higher monthly payments in the future. A borrower that anticipates a rise in income may also benefit from an interest only loan. Interest only periods typically last for 5 years. After the 5 years the borrower has saved a considerable amount of money but they now have no equity in their home since none of their monthly payments went towards the principal. Only is special circumstances should an interest only loan be considered.


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