Interest only Loan Definition

An interest only loan is a loan, usually a mortgage, with a repayment schedule structured such that the borrower pays back only the accumulated interest on the principal and does not pay down the principal itself. In the US, most interest only loans have durations of five to ten years and subsequently must either be paid off or automatically convert to an amortizing loan.

Interest only loans reduce the loan payment amount during the early years of the loan. For example, if you purchase a $500,000 home on an interest only mortgage loan and make the scheduled payments for the full term of the loan, you would still owe $500,000 in principal at the end of the loan. Proponents of interest only loans note that for most mortgages, the amount of principal paid off during the first few years of the loan is fairly small.