Interest-Only Loan

With an interest-only loan, the borrower pays just the interest for an agreed period and the balance stays where it started. Because the payment is smaller than a fully amortizing one, it leaves more cash flow and raises cash on cash return for as long as the interest-only period lasts.

On the default $375,000 loan at 7.25%, interest only costs $27,188 a year against $30,698 amortizing. Cash flow rises from $9,512 to $13,022, and cash on cash from 6.3% to about 8.7%. The calculator has an interest-only switch that shows this directly.

The extra return is partly a relabeling. Amortizing payments include about $3,600 of principal in year one, which is your money building equity rather than a cost. Interest only moves that dollar from equity into cash flow, and the payment rises when the interest-only period ends and principal starts.

Further reading: Interest-Only Loan on Wikipedia.