Financing
Interest-only loan
A loan structure that permits scheduled payments of interest without required principal reduction for a stated initial period.
Glossary
Financing
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An interest-only loan allows scheduled payments that cover interest but do not amortize principal during the interest-only period. The balance therefore does not decline from those scheduled payments. After that period, the loan may amortize over the remaining term, require a balloon payment, or follow another contract-defined structure.
The initial payment can look low while creating later payment shock. Underwrite the reset rate, remaining amortization period, maturity balance, taxes, insurance, operating expenses, vacancy, and refinance risk rather than comparing only the first payment.
Example: a 30-year loan with five interest-only years may need the same principal repaid over the final 25 years. Even if the rate never changes, the scheduled payment rises when principal amortization begins.
Questions for the note and disclosure
Identify the interest-only end date, rate type and adjustment rules, amortization after reset, prepayment terms, maturity date, recourse, covenants, and whether extra payments reduce future required amounts or only principal.
Investor use and risk
Interest-only financing can preserve near-term liquidity during renovation or lease-up, but it increases dependence on future cash flow, sale, or refinancing. Model a higher-rate and lower-value exit before relying on it.