Interest-Only Loan Calculator

Related Calculators

Table of contents

• How to use
• Common mistakes
• Definitions
• Methodology
• Limitations & assumptions
• Sources

Loan amount: The amount borrowed. It is the starting principal balance used in the payment formulas.

Interest rate: The yearly interest rate entered as a percent per year. The calculator divides it by 12 to get a monthly rate.

Interest-only period: The part of the loan term when payments cover interest but do not lower the loan balance [1].

Monthly payment after interest-only period: The monthly principal-and-interest payment needed to pay off the same loan balance over the remaining months.

Months left to pay down the loan balance: The number of monthly payments left after the interest-only period ends.

Total interest paid over full loan: The interest portion of all modeled payments, not including the original amount borrowed.

Mistake: Entering the home price in Loan amount instead of the amount borrowed.
Fix: Use the actual loan principal after any down payment.

Mistake: Typing Interest rate as a monthly rate, such as 0.5, when you mean 6 percent per year.
Fix: Enter the yearly Interest rate shown on the loan, such as 6 for 6 percent per year.

Mistake: Making Interest-only period equal to or longer than Total loan term.
Fix: Shorten the Interest-only period so there are months left to pay down the loan balance.

Mistake: Reading Interest-only monthly payment as a payment that reduces the balance.
Fix: Remember that Interest-only monthly payment covers interest only; the Loan amount stays the same during that period.

Mistake: Planning only for Interest-only monthly payment and ignoring Monthly payment increase after interest-only period.
Fix: Use Monthly payment increase after interest-only period to check whether the later payment fits your budget.

• The calculation assumes a fixed interest rate for the full loan. Adjustable-rate loans can change when the rate resets.
• The payment amounts exclude property taxes, homeowners insurance, mortgage insurance, HOA fees, closing costs, late fees, and other loan charges.
• The model assumes no extra payments, no missed payments, no refinance, and no change to the loan balance during the interest-only period.
• The Total loan term must be longer than the Interest-only period, because the loan needs time left to pay down principal.
• The yearly Interest rate is treated as a nominal annual rate split into 12 monthly periods.
• Real lender disclosures may round each monthly payment to the nearest cent, so final totals can differ by a few cents.

How the two payment phases are calculated

The calculator uses the same loan balance in both phases because interest-only payments do not reduce principal. First it converts the yearly Interest rate into a monthly rate.

monthly_rate = annual_rate_percent / 100 / 12

Then it finds the interest-only payment.

io_monthly_payment = loan_amount * monthly_rate

Next it finds the months left after the interest-only period.

remaining_months = total_term_years * 12 - interest_only_years * 12

If the monthly rate is greater than 0, the later monthly payment uses the standard fixed-payment loan formula.

after_io_monthly_payment = loan_amount * monthly_rate * (1 + monthly_rate)^remaining_months / ((1 + monthly_rate)^remaining_months - 1)

If the rate is exactly 0, the later payment is the loan amount divided by the remaining months.

after_io_monthly_payment = loan_amount / remaining_months

The payment jump is the later payment minus the interest-only payment.

payment_increase = after_io_monthly_payment - io_monthly_payment

Total paid adds the payments from both phases, and total interest subtracts the original loan amount.

total_paid_over_loan = io_monthly_payment * interest_only_years * 12 + after_io_monthly_payment * remaining_months

total_interest_paid = total_paid_over_loan - loan_amount

Mini example

For a $300,000 loan at 6 percent per year, with a 30-year total term and a 10-year interest-only period, the monthly rate is 0.005. The interest-only payment is $1,500.00. There are 240 months left to pay down the loan balance, so the later monthly payment is $2,149.29. The monthly payment increase is $649.29, and the total interest paid over the full modeled loan is $395,829.85.