Interest Only Mortgage Calculator

Interest Only Mortgage Calculator - Calculate Your Interest-Only Loan Payments

Our Interest Only Mortgage Calculator helps you understand the true cost of an interest-only mortgage loan. Calculate your monthly payments during the interest-only period and see what your payments will become when you start paying down the principal. This tool is essential for homebuyers considering interest-only mortgages and real estate investors managing cash flow. Compare options with our Mortgage Payment Calculator and Amortization Calculator.

How to Use the Interest Only Mortgage Calculator

Using our calculator is simple. Enter your mortgage amount, annual interest rate, the interest-only period in years, and the total mortgage term. The calculator instantly shows your interest-only monthly payment, the principal and interest payment for the remaining term, and a full amortization schedule.

Mortgage Amount: The total loan amount you are borrowing.
Annual Interest Rate: The annual interest rate on your mortgage.
Interest-Only Period: The number of years you will pay only interest.
Total Mortgage Term: The full term of the mortgage including the interest-only period.

For example, a $200,000 mortgage at 6.5% with a 5-year interest-only period and a 30-year total term would have an interest-only payment of approximately $1,083.33 per month for the first 5 years. After that, the payment would increase to approximately $1,264.14 per month for the remaining 25 years as you begin paying down the principal.

What is an Interest-Only Mortgage?

An interest-only mortgage is a type of loan where you pay only the interest on the loan for a specified period at the beginning of the loan term. During the interest-only period, your monthly payments are lower because you are not paying down the principal balance. After the interest-only period ends, your payments increase as you begin paying both principal and interest over the remaining loan term.

Interest-only mortgages can be attractive for homebuyers who expect their income to increase in the future, real estate investors who plan to sell the property before the interest-only period ends, or borrowers who want to minimize initial monthly payments. However, they carry the risk of payment shock when the interest-only period ends and the payments increase significantly.

Interest-Only Mortgage Formula

The calculation involves two phases. During the interest-only period, the monthly payment is:

Interest-Only Payment = Loan Amount x (Annual Interest Rate / 12)

After the interest-only period, the payment is calculated using the standard amortization formula on the remaining balance (which is the same as the original loan amount):

M = P x [r(1+r)^n] / [(1+r)^n - 1]

Where M is the monthly payment, P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the number of remaining monthly payments.

Benefits and Risks of Interest-Only Mortgages

Interest-only mortgages offer several benefits including lower initial monthly payments, increased cash flow for investors, and the ability to afford a more expensive home. However, they also carry significant risks such as payment shock when the interest-only period ends, no equity building during the interest-only period, and the potential for negative amortization if the property value declines.

Frequently Asked Questions

Who should consider an interest-only mortgage?

Interest-only mortgages may be suitable for homebuyers who expect significant income growth, real estate investors who plan to sell or refinance before the interest-only period ends, and borrowers who want to maximize cash flow in the short term. They are generally not recommended for risk-averse borrowers or those planning to stay in the home long-term.

How much can I save with an interest-only mortgage?

During the interest-only period, your monthly payments are typically 20-40% lower than a traditional amortizing mortgage because you are not paying down principal. However, over the full loan term, you will pay more total interest since the principal is not being reduced during the interest-only period.

What happens when the interest-only period ends?

When the interest-only period ends, your monthly payments will increase significantly as you begin paying both principal and interest. This is called payment shock. Our calculator shows you both payment amounts so you can plan ahead. Some borrowers choose to refinance before the interest-only period expires.

Are interest-only mortgages still available?

Yes, interest-only mortgages are still available from many lenders, though they are less common than before the 2008 financial crisis. They typically require higher credit scores, larger down payments, and may have higher interest rates compared to traditional mortgages.

Can I make principal payments during the interest-only period?

Yes, most interest-only mortgages allow you to make additional principal payments during the interest-only period without penalty. This can help you build equity early and reduce the payment shock when the interest-only period ends.

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