Interest-Only Loan
Definition
A loan where you pay only interest for a set period (interest-only period), then principal plus interest after. Common in adjustable mortgages. Keeps payments low initially but you don't build equity during interest-only period.
Why It Matters
Interest-only loans can be dangerous if you can't afford principal repayment after the initial period. Many people assumed they could refinance, then rates rose and they were trapped. Understand the full payment after interest-only ends.
Example
Get an interest-only mortgage on $400,000 at 4% for 5 years. Payments: $1,333 per month (interest only). No principal paid. After 5 years, if rates are 6%, new payment becomes $2,400+ per month for 25 years. Many people couldn't afford it.