What type of loan only allocates monthly payments to interest without paying off principal?

The correct answer is the straight or term mortgage, which is characterized by the structure of its payments. In a straight or term mortgage, borrowers make regular monthly payments that cover only the interest on the loan for a specified period. This means that while the borrower benefits from lower monthly payments, they do not reduce the principal balance during the term of the loan. At the end of the term, the entire principal amount becomes due.

This type of loan is often used for short-term financing or specific situations where the borrower anticipates selling the property or refinancing before the term ends. It differs significantly from an amortized loan, which systematically pays down the principal along with interest over the life of the loan, and from fully amortized loans, which are designed to pay off both principle and interest by the end of the term. Balloon mortgages also require interest payments but typically involve a lump sum payment of the remaining principal at the end of the term, distinguishing it from the straight or term mortgage where only interest is paid throughout.