1. Mortgage in which the borrower pays only interest for a set term. At the end of this term, typically five to ten years in the United States, the loan converts to a fully amortizing loan in which both interest and principal are paid. An interest-only loan reduces loan payments in the early years of a loan, so borrowers who expect their income will grow over the loan term can take out a larger Mortgage for purchase of a home.

2. Commercial loan or line of credit paying interest at regular intervals until maturity, when the entire balance is due. The borrower makes regular interest payments, and pays down the loan principal during the annual out of debt period, when the borrower is required to be free of debt. See also Balloon Maturity; Bullet Loan.

Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.