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Interest-Only Loan Calculator

Enter the loan amount, rate and terms. In the default example the interest-only payment is $1,750.00, then the payment becomes $2,120.34 after the interest-only period.

How the interest-only loan calculator works

With an interest-only loan you pay only the interest for a set period, so the balance does not go down. As the Consumer Financial Protection Bureau explains, the amount you owe does not fall with each payment during that period. After it ends you may pay the balance in full, refinance if possible, or start repaying principal with payments higher than the interest-only amount.

This calculator assumes the last case. It shows the low interest-only payment, the higher payment once principal repayment starts over the remaining term, and how total interest compares with a standard loan of the same length.

The formulas

Interest-only payment = balance x annual rate / 12
Payment after = B x i / (1 – (1 + i)^-N)

B is the original balance, i is the monthly rate and N is the number of months left after the interest-only period. A standard loan uses the same payment formula over the full term.

Example: This is an illustration. On $300,000 at 7 percent with 5 interest-only years in a 30-year loan, the first payment is $1,750.00. After year five the payment becomes $2,120.34, an increase of $370.34, because the same balance must now be repaid in 25 years. A standard loan would cost $1,995.91 a month from the start. Total interest is $441,101.28 for the interest-only loan against $418,526.69 for the standard loan, so the interest-only structure costs $22,574.58 more.

Things to keep in mind

  • The rate is held constant. Adjustable-rate loans can change the payment further.
  • No principal is repaid during the interest-only years, so you build no equity from payments in that time.
  • Property values can fall, which can make refinancing harder at the end of the period.
  • Fees, taxes and insurance are not included.

To compare with a loan that repays principal from the start, use the loan payoff calculator. This tool is informational and not financial advice.

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    Frequently asked questions

    How is an interest-only payment calculated?

    Multiply the balance by the annual rate and divide by 12. The default example gives $1,750.00 a month.

    What happens when the interest-only period ends?

    Payments reset to include principal. In the default example the payment rises from $1,750.00 to $2,120.34.

    Is an interest-only loan cheaper overall?

    Not usually. Because the balance is not reduced early, total interest is higher. The default example costs $22,574.58 more than a standard loan.

    Who uses interest-only loans?

    Some borrowers use them for lower early payments, for example when they expect income to rise. The risk is the later payment increase.

    Can I pay principal during the interest-only period?

    Many lenders allow extra principal payments, but terms vary. Check your loan agreement.

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