A loan with an interest-only payment does not amortize—the minimum payment due is the interest accrued on the outstanding balance over the prior month. There are two (quite opposite) reasons to seek out a loan with an interest-only payment.

If you want the lowest possible monthly payment, an interest-only payment is about as low as you can go. On the other hand, if you plan to prepay your loan it can be nice to have your payment refigured monthly. Whatever you pay beyond the minimum payment reduces the principal balance, which, in turn, reduces the minimum payment due next month.

This flexibility is a key benefit of an interest-only loan, but you do need to plan ahead. Eventually the loan will need to be paid back. If you’ve elected to pay minimum payments, at some point the loan will either convert to an amortizing loan with a higher payment or a balloon payment will come due. A home equity line of credit will commonly have an interest-only minimum payment due during its “draw” period.

First mortgages with interest-only minimum payments, although quite common during the 2000s, have dwindled in availability. Qualified Mortgage (QM) rules have made them even harder to come by, as an interest-only payment excludes a loan from being considered a QM.