Interest-Only Loan Calculator
See the low interest-only payment, the jump when principal payments start, and the true cost compared with a standard loan.
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An interest-only loan lets you pay just the interest for a set number of years, often 5, 7 or 10, before principal payments begin. The early payments are low, but the balance doesn’t fall, and the payment jumps sharply when the interest-only period ends. This calculator shows both payments, the size of the jump, and how much more the loan costs than a standard amortizing loan of the same term.
How to use the interest-only loan calculator
- Enter the loan amount and the interest rate.
- Enter the interest-only period in years.
- Enter the total loan term, including the interest-only years.
The results show the interest-only payment, the payment after the interest-only period, the payment increase, the total interest and the extra interest compared with a loan that amortizes from day one.
How the payments are calculated
During the interest-only period:
interest-only payment = balance × annual rate ÷ 12When it ends, the full balance is amortized over the remaining years:
payment = balance × r ÷ (1 − (1 + r)^−n)r is the monthly rate and n is the number of months left. Because n is shorter than the original term, this payment is higher than a standard loan’s payment would have been.
Worked example
A $400,000 loan at 6.5% with a 10-year interest-only period on a 30-year term:
- Interest-only payment: 400,000 × 0.065 ÷ 12 = $2,166.67 for 10 years.
- After year 10, the full $400,000 is repaid over 20 years: $2,982.29 a month, an increase of $815.63 (+38%).
- Total interest: $575,750.21.
- A standard 30-year loan would cost $2,528.27 a month and $510,177.95 in interest, so the interest-only structure costs $65,572.26 more.
After 10 years on the standard loan, the balance would already be down to about $339,105. On the interest-only loan, you still owe the full $400,000.
When an interest-only loan can make sense
- Investors who plan to sell or refinance a property before principal payments start.
- Borrowers with irregular income, such as bonuses or commissions, who will pay down principal in lump sums.
- Short-term needs, such as bridge financing or construction loans that are interest-only by design.
- Disciplined savers who invest the difference and earn more than the loan rate. That is rarely guaranteed.
Common mistakes
- Budgeting for the interest-only payment only. Plan for the higher payment from the start, or you may face payment shock in a few years.
- Assuming you can always refinance. Rates, home values and lending rules can change before the interest-only period ends.
- Ignoring variable rates. Many interest-only loans are adjustable. If rates rise, both payments go up.
- Forgetting that the balance isn’t falling. If the property’s value drops, you have no equity cushion from principal payments.
To see how a fully amortizing loan pays down over time, use the amortization calculator. For a revolving line of credit with an interest-only draw period, use the line of credit calculator.
Frequently asked questions
How is an interest-only payment calculated?
Multiply the loan balance by the annual rate and divide by 12. A $400,000 loan at 6.5% has an interest-only payment of 400,000 × 0.065 ÷ 12 = $2,166.67 a month. None of it reduces the balance.
What happens when the interest-only period ends?
The loan starts amortizing over the remaining term, so the payment rises to cover principal as well as interest. Because the whole balance has to be repaid in fewer years, the new payment is higher than a standard loan's payment would have been from the start.
Are interest-only loans a good idea?
They can suit borrowers with irregular income, investors who expect to sell or refinance, or people who will reliably invest the payment savings. For most homeowners they cost more in interest and carry payment-shock risk, so plan for the higher payment before you sign.
Can I pay principal during the interest-only period?
Usually yes. Any extra payment reduces the balance, which lowers future interest and the payment after the interest-only period ends. Check the loan agreement for prepayment rules.