What Is Interest-Only Loan?
An interest-only loan lets a borrower pay only the interest for an initial period (often 5-10 years), with no principal reduction, before payments increase to include principal.
Why it matters
Payments are lower during the interest-only period, but the borrower builds no equity through payments and faces a significant payment jump once the interest-only period ends.
Interest-Only Loan vs. Fully-Amortizing Loan
Payments cover interest only for an initial period — lower payments up front, but no equity built through payments and a payment jump when the period ends.
Every payment includes both principal and interest from day one, steadily paying the loan down to zero by the end of the term.
More Financing Terms
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Understand a property's costs and risks before you make an offer
Use the free calculator for your own numbers, or analyze a specific home before you commit.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.