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.