Many private mortgages only ask you to pay the interest each month. That keeps payments lower, which is often exactly what a borrower in a tight spot needs. But it also means the balance doesn’t shrink. Here’s how interest-only payments work, and what that means for your plan.

What “interest-only” means

With a regular bank mortgage, each payment covers interest plus some of the amount you borrowed, so the balance goes down over time. With an interest-only mortgage, each payment covers just the interest. At the end of the term, you still owe the full amount you borrowed.

How to estimate the payment

A simple estimate is:

Loan amount × annual interest rate ÷ 12 = monthly interest-only payment

For example, with round numbers chosen only to show the math: a $200,000 loan at a 10% annual rate works out to about $1,667 a month. Your actual rate, and how your lender calculates interest, may differ, so always confirm the payment in your mortgage documents.

Why private lenders use interest-only payments

  • Short terms. Over a one-year term, paying down principal makes little difference to the lender’s risk.
  • Affordability. Lower payments help borrowers who are rebuilding credit or catching up on debts.
  • The plan is to refinance or sell. The loan is expected to be paid off in one lump sum, not over decades.

The pros

  • Lower monthly payments than a fully amortized loan of the same size
  • More breathing room while you fix the problem that led to the private mortgage
  • Simpler to understand: the payment doesn’t change during the term

The cons

  • Your balance stays the same. You’re not building equity through payments.
  • You need a lump sum at the end. Usually that means refinancing or selling, which is why the exit strategy matters so much.
  • Renewing costs money. If your plan takes longer, renewal fees and another year of interest add up. See terms and renewals.

Prepaid interest and interest reserves

Some lenders take a few months of interest from the loan at closing, sometimes called prepaid interest or an interest reserve. This lowers the cash you receive, but means those payments are already covered. Ask how many months, if any, will be held back and what happens to them if you pay off early.

Can you pay down the principal anyway?

Sometimes. Some private mortgages allow extra payments without penalty; others don’t. If you expect to have money coming in, such as a bonus, an inheritance or a sale, ask about prepayment terms before you sign.

Make sure the payment fits

A good broker will check that the payment is comfortable for you, not just possible on paper, and that the plan to repay at the end is realistic.

This article is general information, not financial or legal advice. Lender requirements, rates and fees change and depend on your situation.