What is a Interest-Only Loan?

Graham W. Parham • October 1, 2025

Share this article

What is a Interest-Only Loan?


An Interest-Only loan is a loan in which, for a set period of time, the borrower pays only interest on the principal balance, with the principal balance remaining unchanged. A loan may be interest-only for its full term or for just a portion of the term. If interest-only payments are for less than the full term, that portion is referred to as the “interest-only period” and typically occurs at the beginning of the loan term. Once the interest-only period has expired, the loan will begin amortizing and loan payments will increase in order to reduce the principal balance.


For example, a $100,000 loan with a 5.0% interest rate and 10 years of interest-only payments before amortizing on a 20-year schedule would have monthly payments $416.67 for the first 120 months (calculated as $100,000 balance times 5.0% rate divided by 12 months per year). Beginning in month 121, monthly payments would increase to $584.59 to account for amortization. Interest-only payments have the effect of increasing cash-on-cash yields as less cash is dedicated to debt service payments.


However, since the principal balance is not being reduced during the interest-only period, an investor is not benefiting from equity build-up during that time. Additionally, both the investor and lender may be incurring greater risk with an interest-only loan, as the principal balance at maturity will be greater than if the loan were amortizing throughout its term. For this reason, interest-only loans are typically only made in situations where a lender feels comfortable with the loan’s balance at maturity relative to the projected property value at that time or in situations where a property’s cash flow is projected to increase over time and may not be able to meet amortizing debt payments early on.


With a rental interest-only loan, you only pay off the interest each month and initial term, resulting in a lower monthly payment. After the initial interest-only period is over, you will be required to pay the principal and interest for the remainder of the loan term.


Today's interest-only loans do not have balloon payments; they typically aren't even allowed under The Dodd Frank Act for Qualified Mortgages (Fannie Mae and Freddie Mac). Although the Non-Qualified Mortgages do allow for interest only


DSCR loans (Non-QM) offers an interest-only term lasts for 10 years followed by a 20-year amortization period. Loans can be structured as a 30-year fixed or as adjustable-rate mortgages (ARM). If you were to choose a 10/1 I/O ARM, your interest-only period would last for ten years but after the ten years, your interest rate will adjust once a year until you finish repaying the loan.


The Parham Team believes in educating and engaging our customers throughout the loan process. We look forward to hearing from you to begin that process. Contact us today at 214-679-3396 or schedule a call with a  Loan Specialist.

 

Recent Posts

By Graham Parham November 15, 2025
Practical Ways Real Estate Investors Can Use ChatGPT If you’re in real estate, you already know how many hats we wear—analyst, marketer, landlord, troubleshooter, and sometimes therapist. Tools like ChatGPT won’t replace what investors do, but they can make your day a whole lot easier. Here are seven smart ways to put
By Graham Parham November 9, 2025
What is Net Operating Income? NOI in real estate is one of several metrics used by investors to determine how profitable a property is. Most frequently, net operating income is a benchmark used by investors to determine the amount of cash flow and profitability of a potential deal or income-generating property. NOI
By Graham Parham October 21, 2025
The BRRRR Method — Buy, Rehab, Rent, Refinance, Repeat — is one of the most effective strategies for building long-term wealth through real estate. It allows investors to recycle their capital, scale faster, and create steady cash flow while building equity. 1. Buy Successful BRRRR deals start with buying undervalu
By Graham Parham October 19, 2025
Reasons to Invest in Single-Family Homes Making investments to build wealth and secure your future is very important, and an excellent way to add to your portfolio is through real estate ownership. When you first get into property investment, though, there’s one big question you’ll need to ask yourself – should you inv
By Graham W. Parham October 6, 2025
What is Turnkey Investing? At its core, turnkey real estate investing is where you buy already rehabbed, tenant-filled, managed properties that are producing positive cash flow. A lot of the extra work that goes into real estate investing is cut […] The post 5 Things You Should Know Before Investing in a Turnkey Property appeared first on Texas Investor Loans.
By Graham W. Parham October 3, 2025
When investing in real estate, you have to ask yourself “Do you want to be a landlord or do I want to be an investor”? If you say yes to both, then it is time to quit your full-time job […] The post What to Expect When Buying a Turnkey Property? appeared first on Texas Investor Loans.
By Graham Parham September 30, 2025
What the Numbers Say About Housing During a Government Shutdown With the current and ongoing federal government shutdown, you may be wondering: “Does this mean the housing market completely stops in its tracks?” In short, no; the market still keeps working. Homes continue to be listed, contracts continue to be
By Graham W. Parham September 30, 2025
Experienced real estate investors with multiple mortgaged investment properties (Over 10 Loans) and self-employed investors without W2’s often have difficulty meeting conventional loan criteria. Qualified Mortgages (Fannie Mae & Freddie Mac) require the borrowers Credit, Assets, and Income requirements of […] The post Debt Service Coverage Loan – Investment Properties appeared first on Texas Investor Loans.
By Graham W. Parham September 26, 2025
What is a HELOC? A Home Equity Line of Credit (HELOC) is a type of second mortgage that allows homeowners and investors to borrow money against the equity they have in their property owned and receive that money as...
Show More