Interest-Only Loan Calculator
Calculate payments and compare interest-only loans with traditional amortizing loans.
DISCLAIMER: This calculator provides estimates only. Results may vary based on individual circumstances. Please consult with a qualified financial advisor before making important financial decisions.
Loan Payment Results
Interest-Only Loan
Monthly Payment (I-O Period):
Monthly Payment (After I-O):
Total Interest Paid:
Traditional Loan
Monthly Payment:
Total Interest Paid:
Interest Difference:
Payment Jump Alert:
About Interest-Only Loans
An interest-only loan is a type of loan where the borrower only pays the interest on the principal for a specified period, typically 5-10 years. After this interest-only period ends, the loan converts to a standard amortizing loan where payments include both principal and interest.
How Interest-Only Loans Work
With an interest-only loan, your monthly payments during the initial period only cover the interest that accrues on the loan. Since you're not paying down the principal during this time, your loan balance remains unchanged. Once the interest-only period ends, the loan recalculates to amortize the entire principal over the remaining term, which results in higher monthly payments.
Calculation Formulas
Interest-Only Payment Formula:
Monthly Payment = Loan Amount × (Annual Interest Rate ÷ 12)
Standard Amortized Payment Formula:
Monthly Payment = P × [r(1+r)ⁿ] ÷ [(1+r)ⁿ-1]
Where:
- P = Principal (loan amount)
- r = Monthly interest rate (annual rate divided by 12)
- n = Total number of payments (loan term in years × 12)
Advantages of Interest-Only Loans
- Lower initial payments: Monthly payments during the interest-only period are significantly lower than with a traditional loan.
- Cash flow flexibility: The lower payments free up cash for other investments or expenses.
- Potential tax benefits: In some cases, interest payments may be tax-deductible (consult a tax professional).
- Qualification flexibility: Some borrowers may qualify for larger loan amounts due to the lower initial payments.
Disadvantages of Interest-Only Loans
- Payment shock: When the interest-only period ends, monthly payments can increase substantially.
- No equity building: During the interest-only period, you're not building equity through principal payments.
- Higher total interest: Over the life of the loan, you'll typically pay more interest than with a traditional loan.
- Market risk: If property values decline, you could end up owing more than the property is worth.
Who Should Consider an Interest-Only Loan?
Investors: Real estate investors who plan to sell or refinance before the interest-only period ends.
Variable income earners: People with irregular income patterns, such as commission-based sales professionals or seasonal workers.
Short-term homeowners: Individuals who don't plan to stay in their home long-term.
Strategic financial planners: Those who wish to invest the difference between interest-only and traditional payments into potentially higher-yielding investments.
Example Comparison
For a $300,000 loan at 5% interest for 30 years:
- Traditional loan: $1,610 monthly payment
- Interest-only loan (first 10 years): $1,250 monthly payment
- Interest-only loan (after 10 years): $1,976 monthly payment
Note: The interest-only loan would result in approximately $43,000 more in total interest paid over the life of the loan.
How to Use Our Calculator:
- Enter your loan amount
- Input the interest rate
- Specify the total loan term in years
- Enter the interest-only period in years (must be less than the total loan term)
- Click "Calculate Loan" to see a detailed comparison
Our calculator helps you make informed decisions by showing the complete financial picture of both interest-only and traditional loans side by side.
Frequently Asked Questions
What happens when the interest-only period ends?
When the interest-only period ends, your loan will recalculate to amortize the full principal amount over the remaining term. This means your monthly payments will increase significantly because you now need to pay off the entire principal in a shorter time frame, plus ongoing interest. For example, if you have a 30-year loan with a 10-year interest-only period, after those first 10 years, your loan will essentially become a 20-year amortizing loan for the full principal amount.
Can I make principal payments during the interest-only period?
Yes, most interest-only loans allow you to make optional principal payments during the interest-only period. Making even small additional payments toward the principal can help reduce the payment shock when the interest-only period ends and will decrease the total interest paid over the life of the loan. Check with your specific lender to understand their policies on additional principal payments.
Are interest-only loans harder to qualify for?
Following the 2008 financial crisis, lending standards for interest-only loans became more stringent. Today, lenders typically require higher credit scores, lower debt-to-income ratios, and larger down payments for interest-only loans compared to traditional mortgages. Lenders want to ensure borrowers can handle the higher payments after the interest-only period ends. Some lenders may also require proof of significant cash reserves or higher income levels.
What are typical interest-only loan terms?
Interest-only loans typically offer interest-only payment periods of 5-10 years, though some may extend to 15 years. After this period, the loan converts to a fully amortizing loan for the remainder of the term. The total loan term is commonly 30 years, similar to traditional mortgages, but can range from 15 to 40 years depending on the lender. Interest rates on interest-only loans are usually slightly higher than those on comparable traditional loans to offset the additional risk to the lender.