Why the Interest in Interest Only Loans?

Interest only loans have several advantages over amortizing loans. Interest only loans require only the payment of interest each month, which reduces the typical mortgage payment about 25%. Thus, a buyer can afford more house for the same payment, increasing their buying power. The other advantage of the interest only loan is something called “recasting”. With a traditional loan, any additional payment of principal would shorten the length of the loan but not affect the monthly payment. With an interest only, any principal payment would result in a lower monthly payment since interest is calculated on the remaining mortgage balance.