In the old fashioned mortgage loan market, you pay a part of your mortgage, and the monthly interest with each monthly mortgage payment you submit. That?s the way a typical mortgage works. But there exist now new kinds of mortgages that only pay the interest.
Basically the borrower can pay what he wants, as long as he covers the minimum of the interest payment. Even with more conventional home loans, you could pay additional on your mortgage to reduce the principal balance more quickly, but the idea here is to keep the monthly payment low.
This loan had its place when housing prices were escalating, since even if you never paid down part of your mortgage, you would still have plenty of equity because of the home?s increased price. Equity was increased by a combination of mortgage paydown and increased housing values.
However, developments in the real estate market mean that this kind of increased value is no longer guaranteed, so any equity has to be built by paying off the principle. There are situations where interest only loans are a good idea. This might be valid option as long as it were a temporary situation.
Suppose, for example, that a couple bought a house at the time when one of them was employed and one of them was still in school. Theoretically, once the other partner completes school and starts working again, the home loan payments can be increased to begin to reduce the loan.
Another example would be where the homeowner has income that varies greatly from month to month. Such an example might be a project worker who is only paid upon the completion of the project. Keeping the mortgage low in the months when income was low and then paying into equity when the windfall came would be a sensible decision, as long as the discipline was there to make the additional payments.
In any of these cases, it is dangerous to not increase the payment at some point in order to bring the loan balance down. You want to make sure that you pay off some of the mortgage so that you will have some equity put in the home, since you can no longer count on housing market increases to do so. If no equity has been paid down, the owner will have to raise additional money to pay off the mortgage if home values have not sufficiently increased.