How to use the interest-only loan calculator
The calculator opens with a $500,000 loan at 6.75%, interest-only for 10 years out of a 30 years term. Change the inputs to match your loan offer.
- Loan amount and interest rate. If the rate is adjustable, enter the current rate; the result then shows what happens if it stays there.
- Interest-only period: the number of years you pay only interest. Five, seven and ten years are common.
- Total loan term, including the interest-only years. A 30-year loan with a 10-year interest-only period amortizes over the last 20 years.
The results show both payments, the jump between them and the total interest, alongside a standard loan with the same rate and term for comparison. The chart shows the balance staying flat during the interest-only years while a standard loan pays down, and the table gives the payment, interest, principal and balance for every year.
How the payments are calculated
During the interest-only period, the payment covers exactly the interest charged each month:
When the period ends, the full loan amount is amortized over the months left in the term:
Payment increase = Payment after ÷ Interest-only payment − 1N is the total number of monthly payments and m the number of interest-only months. The standard loan used for comparison amortizes the same L over all N months.
A worked example
You borrow $500,000 at 6.75% for 30 years, with the first 10 years interest-only.
For the first ten years the payment is $2,812.50, or $430.49 a month less than the standard 30-year payment of $3,242.99. Over those years you pay $337,500.00, all of it interest, and still owe the full $500,000. A standard loan would be down to $426,505.00 by then.
In year 11, the balance must be repaid over 20 years, and the payment rises to $3,801.82, a jump of 35.2%.
Over the full term you pay $749,936.81 in interest, which is $82,460.24 more than the $667,476.57 a standard loan would cost.
Payment shock: how the interest-only period changes it
The longer the interest-only period, the fewer years remain to repay the loan, and the bigger the jump:
| Interest-only period | IO payment | Payment afterwards | Increase | Extra interest vs standard |
|---|---|---|---|---|
| 5 years | $2,812.50 | $3,454.56 | +22.8% | $37,640.71 |
| 7 years | $2,812.50 | $3,572.07 | +27.0% | $54,664.26 |
| 10 years | $2,812.50 | $3,801.82 | +35.2% | $82,460.24 |
| 15 years | $2,812.50 | $4,424.55 | +57.3% | $135,191.94 |
The interest-only payment is the same in every row; what changes is how much has to be crammed into the remaining years. A 15-year interest-only period on a 30-year loan leaves only 15 years to repay the whole balance.
Many interest-only loans also have adjustable rates, which can reset at the same time as the payment switches to amortizing. If the rate in the example were 8.75% when principal payments begin, the later payment would be $4,418.55. Borrowers who struggled with interest-only mortgages in the past were often hit by both changes at once.
When interest-only makes sense, and when it does not
An interest-only period does not make a loan cheaper; it moves the repayment of principal later. It can be a reasonable choice when:
- Cash flow matters more than equity. Property investors often prefer interest-only debt because the lower payment improves monthly cash flow and the debt service coverage ratio, and they plan to sell or refinance within the interest-only period.
- Income is high but irregular. A borrower paid largely in bonuses or commissions can keep the required payment low and make large principal payments when the money comes in.
- The loan is short by design. Construction, bridge and many commercial loans are interest-only because they are expected to be repaid from a sale or a permanent loan.
It works against you when the plan relies on rising prices. With no principal repaid, you build equity only if the property gains value. If prices fall, you can owe more than it is worth just when you need to refinance or sell. And if your income does not grow, the payment after the jump may not be affordable at all.
A useful test is to ask whether you could afford the payment after the interest-only period today. If you could not, the loan depends on something going right before the jump arrives.
What this calculator does not include
- Rate changes. The calculation assumes the rate stays fixed for the whole term. Most adjustable-rate interest-only loans can reset, sometimes within caps set in the loan agreement.
- Voluntary principal payments during the interest-only period, and how your lender recalculates the payment afterwards.
- Balloon structures. Some interest-only loans do not amortize at all and require the full balance at maturity; use the balloon payment calculator for those.
- Taxes, insurance and fees, which are paid on top of the loan payment.
Your loan agreement sets the exact payment after the interest-only period; use this calculator to see the size of the change and plan for it.