Interest-Only Loan (IO)
Direct definition
A loan with a period during which payments cover only interest, not principal.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
Interest-only loans keep monthly payments low during the IO period, but the balance doesn't shrink. When the period ends, payments jump to fully amortize the remaining balance over a shorter time.
Why it matters
IO loans can be useful for investors and high-income borrowers but require a plan for the payment step-up.
Where you may see it
- Loan Estimate
- Mortgage note
- Amortization schedule
A real-world example
A 10-year IO on a $500,000 loan at 7% has an interest-only payment of about $2,917; when IO ends, payments jump to fully amortize over 20 years.
Educational and illustrative only
A common misunderstanding
An interest-only payment does not reduce your loan balance — the principal stays the same until you start making principal payments.
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This glossary provides general educational information. Mortgage terminology, qualification methods, forms, timelines, fees, program rules, and legal meanings may vary by lender, investor, loan program, property, occupancy, state, and transaction. Definitions do not represent loan approval, legal advice, tax advice, or a commitment to lend.
- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026