Interest Only Loan

An interest-only loan is a type of financing where, for a certain period, the borrower pays only the interest on the principal balance, with the principal balance remaining unchanged. This means lower monthly payments initially because you’re not paying any of the principal. However, after the interest-only period ends, the payments increase because you start paying the principal as well. This type of loan can be risky if the value of the property decreases or if the borrower’s financial situation does not improve, as the payments become significantly higher when principal payment begins. Interest-only loans are commonly used in real estate transactions, particularly for investors who plan to sell the property after a short period or refinance before the interest-only period ends.