With an interest only home loan, a ten year interest-only period is typical.
After this typical ten year period, the principal balance is amortized for the remaining term. What this means is that if you had a thirty-year loan and the first ten years were interest only, at the end of the first ten years, the principal balance would be amortized for the remaining period of twenty years.
In this instance the interest-only payments, in the beginning of the loan, are significantly lower than if the schedule of payments included the principal(thus, making it fully-amortizing). This gives you more flexibility because you are not forced to make payments towards principal. It also enables you to borrow more than you would have otherwise been able to afford. It can also give investors cash-flow when they might not otherwise be able to. During the interest-only years of the mortgage, though, the interest only loan balance will not decrease unless you make payments towards principal reduction.
To explain, under an amortizing mortgage schedule, the portion of a payment that represents principal is very small in the early years (the same period of time that would be interest-only). During the initial years of a fully amortizing loan, the principal reduction will be very little.
You must understand that interest only does not mean “negative amortization.” Interest only loans used properly can be beneficial. For example, in comparing a rent vs. buy scenario, interest-only loans, payments and tax benefits may be beneficial for purchasing and holding homes for a shorter period of time.