Interest-Only Loan
An interest-only loan is a mortgage in which the borrower pays only the interest on the loan for a set initial period — typically 5 to 10 years — before principal payments begin.
During the interest-only period, monthly payments are lower because no principal is being repaid. Once that period ends, the loan fully amortizes over the remaining term, and payments increase — sometimes significantly.
An interest-only loan does not build equity through payments during the initial period. Equity only grows if the property appreciates. If values decline, the borrower may owe more than the home is worth.
Why This Matters: Interest-only loans can be useful for specific financial strategies — but they carry real risk if not fully understood. Knowing what happens when the interest-only period ends is essential before committing to this structure.
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