Financing land isn’t always straightforward. While most loans combine principal and interest in every payment, there’s another option some buyers consider: the interest-only land loan. It can keep early payments lower, but it also carries risks if you plan to hold the property long term.
This guide explains how interest-only land loans work, their advantages and drawbacks, and when they might make sense for buyers.
What Is an Interest-Only Land Loan?
An interest-only land loan is structured so that, for a set period (often 3–10 years), your monthly payments cover only the interest charged on the loan. You don’t pay down the balance during this time, which means:
- Your monthly payments are smaller than a traditional land loan.
- Your loan balance stays the same until the interest-only period ends.
- At the end of that period, your payment will jump because principal repayment begins, or the full balance may be due in a balloon payment.
How Interest-Only Payments Work
Here’s a quick example. Imagine you borrow $100,000 at 8% interest:
- Interest-only period → Payment is about $667/month.
- After interest-only phase → If you switch to a standard 20-year amortization, payments increase significantly.
If you want to run your own numbers, this interest-only land loan calculator makes it simple to see how payments change over time.
Benefits of Interest-Only Land Loans
- Lower initial payments – useful if you’re holding land temporarily or need to save cash for development.
- Flexibility – gives you breathing room before building, farming, or selling.
- Short-term affordability – can be an advantage if your income will increase later.
Drawbacks to Consider
- No equity growth – since you’re not reducing principal, you don’t build ownership during the interest-only period.
- Higher payments later – monthly costs can rise sharply when amortization begins.
- Refinance risk – if land values fall or lending standards tighten, refinancing may be difficult.
When to Use an Interest-Only Land Loan
This type of financing can work well in certain situations:
- Developers or builders: Buying a parcel now with plans to start construction in a few years.
- Short-term investors: Holding land for resale before the principal kicks in.
- Farmers: Expanding acreage while waiting on seasonal or future revenue.
If you’re looking at long-term ownership without clear exit plans, a traditional loan may be more secure. You can compare options using a general land loan payment calculator to see how an amortized loan stacks up.
Sample Payment Comparison
| Loan Scenario | Interest-Only Payment | Amortized Payment (30 yrs @ same rate) |
|---|---|---|
| $50,000 @ 7% | $292/month | $332/month |
| $100,000 @ 8% | $667/month | $734/month |
| $200,000 @ 8% | $1,333/month | $1,468/month |
FAQs About Interest-Only Land Loans
How long is the interest-only period?
Most lenders offer 3–10 years before principal repayment begins.
Can you refinance after an interest-only loan?
Yes, many borrowers refinance into a construction loan or a standard amortized loan.
Are rates higher for interest-only loans?
They can be slightly higher since lenders view them as riskier.
Do interest-only land loans help build equity?
No—equity only builds once you start paying down principal
Tracey is the creator of LandLoansCalculator.com, a trusted resource for accurate and easy-to-use land loan calculators. With a strong focus on clarity and reliability, Tracey is dedicated to helping users understand land financing with confidence. Her goal is to simplify complex calculations so buyers, investors, and professionals can make informed decisions quickly and efficiently.