Interest-Only Period
A stretch at the start of a loan when payments cover only interest, not principal.
An interest-only period is a stretch at the start of a loan when the borrower pays only interest and no principal. Payments are lower during this window because the balance is not being reduced. Interest-only terms commonly run one to three years, and some loans are interest-only for the full term.
Investors use interest-only periods to boost early cash flow, which is useful during lease-up or a value-add plan when income has not fully ramped. Lower payments also improve DSCR in those early years, which can help a deal qualify for more proceeds.
When the interest-only period ends, the loan begins amortizing and the payment jumps, since principal now repays over a shorter remaining schedule. Borrowers plan for that step-up so the higher payment does not strain cash flow.
Formula
Interest-Only Payment = Loan Balance x Rate / 12
Worked Example
On a $3,000,000 loan at 7%, an interest-only payment is 3,000,000 x 0.07 / 12 = $17,500 per month, versus about $21,200 once a 25-year amortization begins.
Why It Matters
Interest-only periods free up cash when a property is still ramping, but the payment rises later. Knowing when amortization starts helps you plan for the higher payment and avoid a cash-flow squeeze.
Related Terms
Related Programs and Tools
Frequently Asked Questions
How long is a typical interest-only period?
One to three years is common on stabilized loans. Bridge and construction loans are often interest-only for the entire term while the plan plays out.
Does interest-only help me qualify?
It can. Lower interest-only payments improve DSCR in the early years, which may support more proceeds, though lenders also test the fully amortizing payment.