What is an interest-only period?

• A. A period when payments cover only interest, not principal, leaving the loan balance unchanged.
• B. A period when principal is paid only and interest accrues.
• C. A period when both interest and principal are paid with a fixed rate.
• D. A period when loan is prepaid.

Answer: (A)

An interest-only period is a phase on a loan when the payments cover only the interest that accrues on the loan each month, so the principal balance doesn’t get paid down during that time. This lowers monthly payments initially, but it also means you’re not building equity because the amount you owe stays the same. After the period ends, the loan typically shifts to payments that include both interest and principal, which usually raises the monthly payment unless you refinance or extend the term. For example, on a 300,000 loan at 4% annual interest, the monthly interest-only payment would be about 1,000, and the loan balance would remain 300,000 during the interest-only period.