Interest Only Loan Calculator

Interest Only Loan Calculator

Compare interest-only payments with traditional principal + interest payments

Loan Amount $300,000
$
Interest Rate 7.0%
Interest Only Period 5 years
During this period, you only pay interest. No principal reduction occurs.
Total Loan Term 30 years
After the interest-only period, remaining balance is amortized over the remaining term.

Interest Only Payment

$0

After IO Period
$0
Payment Increase
$0
Total Interest Paid
$0
vs Traditional
$0

Payment Comparison

Interest Only Loan

Initial Payment: $0
Later Payment: $0
Total Interest: $0
Total Paid: $0

Traditional Loan

Monthly Payment: $0
Consistent: Same for entire term
Total Interest: $0
Total Paid: $0

Payment Schedule Comparison

Principal Balance Over Time

Important Considerations: Interest-only loans can be useful for managing cash flow in the short term, but they come with risks. Your payment will increase significantly after the interest-only period ends, and you won’t build equity during the initial period. These loans work best for borrowers who expect income growth, plan to sell before the IO period ends, or have other investment strategies. Make sure you can afford the higher payment that comes later. This calculator provides estimates for educational purposes only and should not be considered financial advice. Consult with a qualified mortgage professional before making decisions.

Understanding the Calculator Inputs

  • Loan Amount: This is the principal balance—the specific sum of money you plan to borrow from the lender. All interest calculations are based on this initial figure.
  • Interest Rate: The annual percentage charged by the lender for borrowing the funds. Note that this is an annual figure; the calculator divides this by 12 to determine the monthly cost of the loan.
  • Interest-Only Period: This is the duration (in years) where you are only required to pay the interest charges. During this time, your monthly payments do not go toward paying off the actual debt; the loan balance remains unchanged.
  • Total Loan Term: The full lifespan of the loan from start to finish. This is the deadline by which the entire principal balance must be completely repaid.

How to Calculate an Interest-Only Loan

Calculating the payment for the interest-only phase is distinct from a standard mortgage because it does not involve principal reduction. Since the amount you owe (the principal) stays the same during this period, the monthly payment is simply the cost of "renting" that money for one month.

The Formula: To find the monthly payment, multiply the loan balance by the annual interest rate, then divide by 12 months.

Monthly Payment = (Loan Amount × Annual Interest Rate) ÷ 12

For example, if you borrow $300,000 at 7% interest, your monthly cost is $1,750. You will pay this exact amount for every month of the interest-only period, but you will still owe $300,000 at the end of it.

How to Calculate Payments (The Two-Phase Structure)

An interest-only loan is split into two very different payment phases:

Phase 1: The Interest-Only Years During the initial period defined in the calculator, your payments are at their lowest. They cover only the accrued interest. Because you aren't reducing the loan balance, these payments remain level (assuming a fixed interest rate).

Phase 2: The Amortization Years Once the interest-only period ends, the loan resets. You now have a shortened timeline (the Total Loan Term minus the Interest-Only Period) to pay off the full principal balance.

To calculate this, the lender takes the remaining balance and amortizes it over the remaining months using a standard loan formula. This results in a significantly higher monthly payment. This sudden increase is often referred to as "payment shock," which is why this calculator is useful for seeing exactly how much that payment will jump before you commit to the loan.