In real estate finance, an Interest-Only Loan is a non amortizing loan in which the borrower makes payments that cover only the interest on the loan during the term of the loan. The principal balance remains unchanged throughout the interest only period.
At the end of the loan term, the entire principal amount is due in a single lump sum payment. Interest only loans are often used in short term financing or investment situations but carry increased risk because the borrower does not build equity through regular principal reduction.
