Interest-Only Mortgage Calculator
What Is an Interest-Only Mortgage?
An interest-only mortgage is a home loan where, for an initial period, you pay only the interest that accrues on the balance and do not pay down the principal. During this introductory phase your monthly payment can be much lower than on a standard fully amortizing mortgage, but your loan balance does not decrease.
After the interest-only period ends, the loan typically converts to a standard repayment schedule. At that point you must pay both principal and interest, usually over a shorter remaining term. This change often causes a noticeable jump in your monthly payment, which is one of the main risks of interest-only loans.
Interest-only structures are sometimes used by borrowers who expect their income to rise, plan to sell or refinance before the interest-only phase ends, or want to free up cash flow in the short term. However, because the principal does not decline during the interest-only years, you have less equity than you would with a traditional mortgage, all else equal. If property values fall or stay flat, you may even face a situation where selling the home would not fully pay off the loan.
How This Interest-Only Mortgage Calculator Works
This calculator compares two scenarios:
- Interest-only mortgage: You pay interest only for the specified interest-only period, then pay principal and interest for the rest of the term.
- Fully amortizing mortgage: You make level monthly payments of principal and interest over the entire term from the beginning.
To run the calculation, you enter four inputs:
- Loan amount: The starting principal balance of the mortgage.
- Annual interest rate: The nominal yearly interest rate (for example, 6.5 for 6.5%).
- Total term (years): The full length of the loan, such as 30 years.
- Interest-only period (years): The number of years at the start of the loan when you pay interest only.
Behind the scenes, the calculator converts the annual rate to a monthly rate, calculates the monthly payment during the interest-only period, then computes the higher principal-and-interest payment needed to repay the loan over the remaining term. It also estimates total interest paid under the interest-only structure and compares it with the total interest on a fully amortizing loan with the same original term, rate, and loan amount.
Formulas and Calculation Details
The math behind the calculator is based on standard loan and annuity formulas. Here is how the main steps work.
1. Converting the interest rate
The calculator assumes monthly payments. If the annual interest rate is R (expressed as a decimal), the monthly rate r is:
2. Interest-only payment
During the interest-only period, you only pay the interest that accrues each month on the full principal L. Because you are not reducing the balance, the payment is simply:
Where:
- is the monthly interest-only payment.
- L is the loan amount (principal).
- r is the monthly interest rate.
3. Remaining term after the interest-only period
If the total term of the loan is T years and the interest-only period is TIO years, then the number of months remaining for principal-and-interest repayment is:
During the interest-only years, the balance remains equal to the original loan amount L. Once that period ends, the same balance must be amortized over n months.
4. Principal-and-interest payment after the interest-only period
When the loan begins to amortize, the monthly payment P is calculated using the standard annuity formula:
Here:
- P is the new monthly payment once principal repayment begins.
- L is the principal balance at that time (equal to the original loan amount in this simplified model).
- r is the monthly interest rate.
- n is the number of remaining monthly payments.
The same formula is also used to calculate the payment on a fully amortizing mortgage from the start of the loan, except that in that case n equals the total number of months in the full term (for example, 360 for a 30-year loan).
5. Total interest comparison
To estimate total interest paid in each scenario, the calculator multiplies the monthly payment by the number of payments in that phase and subtracts the principal repaid. In essence:
- Interest-only structure: interest during the interest-only years plus interest during the amortizing years.
- Fully amortizing structure: interest embedded in all monthly payments over the full term.
The difference between these totals provides an estimate of the additional interest cost (or potential savings) associated with choosing an interest-only mortgage instead of a traditional one, assuming the loan is held to the end of the term.
How to Interpret Your Results
The key outputs from the calculator can help you assess both short-term affordability and long-term cost.
- Monthly interest-only payment: This shows your required payment during the introductory period. It is usually significantly lower than a standard principal-and-interest payment.
- Monthly payment after the interest-only period: This is the new, higher payment when principal repayment begins. Comparing this figure with your current and expected future income is critical to avoid payment shock.
- Fully amortizing payment from day one: This tells you what you would pay each month if you chose a traditional mortgage with the same term and interest rate.
- Total interest paid under each option: These figures highlight how much extra interest you may pay for the short-term benefit of lower initial payments.
- Difference in total interest: A larger positive difference means the interest-only structure costs more over the full life of the loan if held to maturity.
As you adjust the inputs, pay attention to how the length of the interest-only period and the interest rate affect both the size of the payment jump and the total interest cost. Longer interest-only periods generally reduce your principal-and-interest payment window, which can make the later payment much higher.
Worked Example
Consider the following example to see how the calculator’s logic plays out.
- Loan amount: $400,000
- Annual interest rate: 6.5%
- Total term: 30 years
- Interest-only period: 5 years
Step 1: Monthly rate and terms
The annual rate of 6.5% corresponds to a monthly rate of 0.065 / 12 ≈ 0.0054167 (about 0.5417% per month). The total term is 30 years, or 360 months. The interest-only period is 5 years, or 60 months, leaving 360 − 60 = 300 months for principal-and-interest payments.
Step 2: Interest-only payment
During the first 5 years, the monthly interest-only payment is:
$400,000 × 0.0054167 ≈ $2,167
The balance remains $400,000 throughout this interest-only phase.
Step 3: Payment after the interest-only period
Once the interest-only phase ends, the loan must be repaid over the remaining 300 months. Applying the amortization formula with L = $400,000, r ≈ 0.0054167, and n = 300 gives a new principal-and-interest payment of roughly $2,700–$2,800 per month (exact amounts will depend on rounding).
In other words, your payment might jump by more than $500 per month once principal repayment begins.
Step 4: Fully amortizing comparison
If instead you chose a standard 30-year fixed mortgage at 6.5% with no interest-only period, your monthly payment would be calculated over 360 months from the start. The fully amortizing payment at these terms is around $2,528 per month. That is higher than the interest-only payment of about $2,167 during the first 5 years, but lower than the later payment required after the interest-only period.
Over the full 30 years, the interest-only structure would generally result in more total interest paid if you hold the loan to maturity, because the principal remains outstanding for longer and is repaid over a shorter window.
Interest-Only vs. Standard Mortgage: High-Level Comparison
| Feature | Interest-Only Mortgage | Standard Amortizing Mortgage |
|---|---|---|
| Initial monthly payment | Lower, interest only | Higher, principal and interest from day one |
| Payment after intro period | Jumps significantly higher | Stays level (fixed-rate) |
| Principal reduction early on | None during interest-only phase | Gradual principal paydown each month |
| Equity building (excluding home price changes) | Delayed until amortization begins | Starts immediately |
| Total interest cost if held full term | Typically higher | Typically lower |
| Best suited for | Borrowers expecting higher future income, short holding periods, or planned refinance | Borrowers seeking predictable payments and steady equity growth |
| Key risk | Payment shock and slower equity buildup | Higher payments up front |
When an Interest-Only Mortgage Might Make Sense
An interest-only mortgage can be a strategic tool in certain situations, but it is not appropriate for every borrower. It may be worth exploring when:
- You expect your income to increase meaningfully before the interest-only period ends.
- You plan to sell the property or refinance before principal payments begin.
- You value lower payments in the near term and are comfortable with higher payments later.
- You are an investor managing cash flow on rental or short-hold properties.
Even in these cases, it is important to think through what happens if your plans change, interest rates rise, or property values fall. The calculator can help you stress-test these scenarios by adjusting the loan amount, term, and interest-only period to see how sensitive your payments and total interest are to each input.
Assumptions and Limitations
This tool is designed for clarity and comparability, so it relies on several simplifying assumptions. Keep these in mind when interpreting the results:
- The interest rate is assumed to be fixed for the entire loan term.
- Interest is compounded monthly, and payments are made monthly.
- The loan is assumed to remain outstanding for the full term in each scenario (no early payoff, refinance, or sale).
- The calculator does not include closing costs, lender fees, points, mortgage insurance, property taxes, homeowners insurance, HOA dues, or other housing-related expenses.
- It assumes all payments are made in full and on time, with no late fees or penalties.
- It does not model adjustable-rate, balloon, or negative amortization features. Results are most appropriate for fixed-rate, interest-only structures that convert to standard amortization.
Because of these and other simplifications, the outputs are estimates only. Actual lender terms, underwriting standards, and regulations may lead to different payment amounts and timelines.
Disclaimer and Next Steps
All calculations are provided for educational and illustrative purposes and are not a quote, credit decision, or offer of credit. This page does not provide financial, legal, or tax advice. Before choosing an interest-only mortgage or any home loan product, consider speaking with a licensed mortgage or financial professional who can review your full situation.
To further explore your options, you may also want to compare your results with a standard mortgage payment calculator or read more about how amortization works and how different loan terms affect total interest paid.