Interest-only loan
A loan where payments cover only interest for a set period. Principal doesn't drop during that window. Payments jump when the interest-only period ends.
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Part 1 of 4
Why a seller cares
An interest-only loan on your home means the balance has not moved since you took it, so your payoff is the full original amount. It is rare on primary homes now and more common on investment property.
Part 2 of 4
A simple example
You borrowed $250,000 interest-only five years ago. Your payoff at closing is still $250,000 plus the current month's interest.
| The loan | Balance after five years |
|---|---|
| Interest-only | $250,000; nothing was paid down |
| 30-year fixed at the same rate | About $234,000 |
| 15-year fixed | About $185,000 |
Interest-only keeps the payment low by leaving the debt alone.
Part 3 of 4
What people get wrong
That an interest-only loan builds equity through payments. Only the home's value moves the equity; the payments never touch the balance.
Part 4 of 4 · where to read next
Where it appears in the sale
What a definition is, and what it isn't
Keighbor is a software company, not a law firm, brokerage, or tax adviser. This is general information, not legal, tax, financial, or real estate advice about your sale. Your situation may differ. Before acting on a contract, disclosure, title, tax, or pricing question, ask an appropriately licensed professional in your state.
Written and researched by Keighbor Research · drawn from the reference glossary · how we research and check what we publish
In your Room, this word explains itself where it appears.
Your Room defines interest-only loan in the step you meet it in, beside the document or the date it belongs to. Free to set up, with an agent or on your own.
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