Interest only loans are those where the mortgage payment does not include any repayment of principal for some period. The payment consists of interest only. During the period of interest only, the loan balance remains unchanged.

In the 1920's, loans of interest-only for the full term would not amortize. The loan balance would be the same at term as it was at the beginning. This was the norm. Borrowers typically refinanced at term, which worked fine as long as the property did not lose value and the borrower did not lose his/her job, but the depression of the 30's caused a large proportion of these loans to go into foreclosure. Lenders stopped writing them and have never brought them back. Lenders want loans that eventually amortized.

The interest-only loans of today are interest only for a specified period, such as 10 years. At the end of that period, the payment is raised to the fully amortizing level. In such case, the new payment will be larger than it would have been if it had been fully amortizing at the beginning.

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