Definition
During an interest-only period, each payment covers exclusively the interest calculated on the outstanding balance — the principal remains unchanged. This structure is common on home equity lines of credit (HELOC), where the borrower has no obligation to repay the principal as long as the credit limit is not exceeded.
Some B-lenders or private lenders also grant interest-only mortgage loans for a period of one to five years, allowing an investor to maximize short-term cash flow or a struggling borrower to temporarily reduce payments.
Note: at the end of the interest-only period, payments are recalculated to amortize the remaining principal over the remaining term — which can lead to a significant increase in monthly payments ('payment shock'). Since the borrowed principal has not been reduced, the borrower accumulates less equity during this period.