Which loan type allows for interest payments only during an initial period?

An Interest Only Loan is specifically designed to allow borrowers to make only interest payments for a certain initial period, which can typically range from a few years. During this period, the principal balance remains unchanged, meaning that the borrower isn't paying down any of the actual loan amount, just the interest that accrues. This structure can result in lower monthly payments in the early years, making it attractive to some borrowers.

After the interest-only period ends, payments typically increase significantly as borrowers start paying both interest and principal, which means they need to prepare for higher future payments. This can be advantageous for those who anticipate an increase in income or who plan to sell or refinance before the end of the interest-only period.

In contrast, the other options—fixed-rate loans, adjustable-rate mortgages, and conventional loans—are structured differently. Fixed-rate loans involve consistent payments of both principal and interest from the beginning, while adjustable-rate mortgages may adjust the interest rate over time but do not necessarily offer an interest-only payment period. Conventional loans also generally require payments on both principal and interest right away, making them less flexible in terms of initial payment structure.