Interest-Only Loan Calculator

How it works

During the interest-only period you pay just the interest that accrues each month, the balance times the monthly rate. None of it reduces what you owe, so at the end of the period you still owe the full loan amount.

After that, the full balance has to be repaid over the years that are left, not the whole term. Squeezing the principal into a shorter window is why the payment jumps (by more than a third in the example below). The calculator shows both payments and the size of the jump so you can check you could afford the later one.

It also compares the loan with one of the same amount, rate and term that amortizes from the first month. Because the balance stays high for longer, an interest-only loan always costs more interest in total at a positive rate; the last line shows how much more.

Formula

r = rate ÷ 12      N = term years × 12      m = interest-only years × 12
interest-only payment = P × r
payment afterwards = P × r × (1 + r)^(N − m) ÷ ((1 + r)^(N − m) − 1)
total interest = P × r × m + payment afterwards × (N − m) − P
fully amortizing payment = P × r × (1 + r)^N ÷ ((1 + r)^N − 1)
extra interest = total interest − (fully amortizing payment × N − P)

Example

A $400,000 loan at 6.5% for 30 years with the first 10 years interest-only costs $2,166.67 a month for 10 years. Then the $400,000 is repaid over the remaining 20 years at $2,982.29 a month, a jump of $815.63.

Total interest is $575,750.21. The same loan amortizing from the start would cost $2,528.27 a month and $510,177.95 in interest, so the interest-only years add $65,572.26.

Assumptions and limitations

• The interest rate is fixed for the whole term. Many interest-only mortgages are adjustable and can reset when the interest-only period ends, which would change the later payment.
• After the interest-only period the loan fully amortizes over the remaining term with monthly payments at the end of each month. If your loan instead requires the whole balance at the end of the interest-only period, use the balloon loan calculator.
• Fees, taxes, insurance and any extra principal payments are not included.
• This is an estimate for planning, not financial, tax or legal advice. Your loan's disclosures show the actual payment schedule.

Frequently asked questions