βΈοΈ Interest-Only Mortgage Calculator
Pay interest now, principal later.
Monthly interest-only payment
Estimates for planning only, not financial advice.
An interest-only mortgage charges just the interest each month, leaving the principal untouched. On $500,000 at 7%, the payment is 500,000 x 0.07 / 12 = $2,916.67 a month. Over 10 interest-only years you pay $350,000 and still owe the full $500,000 on the last day. That is the deal, in one paragraph.
How to Use This Calculator
Enter the loan balance, rate, and interest-only period. The calculator shows the monthly payment, total interest over the IO years, and the unchanged balance.
Enter the loan balance and interest rate.
Enter the interest-only period in years.
Read the payment and the total interest. For a standard amortizing payment, compare with our mortgage payment calculator.
The Interest-Only Formula
The math is trivially simple, which is the warning and the appeal. A $500,000 loan at 7% amortized over 30 years costs $3,327 a month; interest-only costs $2,917, saving $410 monthly while building zero equity. When the IO period ends, the payment recasts to amortize the full balance over the remaining term, often jumping 30% or more. IO loans are usually adjustable-rate, so the rate can move too.
Worked Example
$500,000 at 7%: $2,916.67 a month. Over 10 years that is $350,000 of interest and $0 of principal; the balance is still $500,000. If the loan then amortizes over the remaining 20 years at the same rate, the new payment is about $3,876, a 33% jump. Borrowers who planned to sell or refinance before the recast are fine; borrowers who planned to "figure it out later" are the cautionary tales.
Who Interest-Only Fits
It fits borrowers with lumpy income who invest the difference deliberately: bonus-heavy executives, business owners, investors maximizing cash flow on rentals. It punishes everyone else, because the forced savings of amortization is the main way most owners build equity. Qualifying uses the fully amortized payment at a stressed rate, so IO does not help you borrow more; it only changes the payment shape.
My blunt view: if you cannot afford the amortizing payment, you cannot afford the house, and IO just delays the reckoning. If you can afford it and choose IO to deploy cash elsewhere at higher returns, run the numbers honestly and keep the discipline. Most people lack the second part. For the equity-building alternative, the mortgage payoff calculator shows what extra principal does.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is an interest-only mortgage?
A loan where monthly payments cover only the interest for an initial period, typically 5 to 10 years, with no principal reduction. After the IO period, payments recast to amortize the full balance.
How is the interest-only payment calculated?
Balance times annual rate divided by 12. A $500,000 loan at 7% costs $2,916.67 a month during the IO period, and the balance never moves.
What happens when the IO period ends?
The loan recasts: the full balance amortizes over the remaining term, so payments jump sharply, often 25-40%. Refinancing or selling before the recast is the usual plan.
Do interest-only loans build equity?
Only through appreciation, never through payments. Every dollar goes to interest. Buyers counting on price gains alone are speculating, not amortizing.
Are interest-only mortgages risky?
For most borrowers, yes: payment shock at recast, no forced savings, and usually adjustable rates. They suit high, irregular incomes managed with discipline, not stretched budgets.
Can I get an interest-only FHA or VA loan?
No. Government programs require amortizing payments. Interest-only is a conventional and jumbo product with stricter qualification.
How do lenders qualify IO borrowers?
On the fully amortized payment at a qualifying rate, not the IO payment. The IO option does not increase how much you can borrow; it only reshapes the early payments.
Is interest tax-deductible on IO loans?
Interest on up to $750,000 of acquisition debt is generally deductible if you itemize, same as amortizing loans. The IO structure does not change the tax treatment.
Can I make principal payments during the IO period?
Usually yes, and it is the smartest move available: voluntary principal payments during the IO years cut the balance that later recasts. Check for prepayment terms, but most IO loans allow it freely.
Who offers interest-only mortgages?
Portfolio lenders, private banks, and jumbo specialists, not government programs. Availability concentrates at higher loan amounts where borrowers have the cash flow to handle the recast.
What is a recast in plain English?
The lender re-amortizes your unchanged balance over the remaining years, which raises the payment. It is automatic at the end of the IO period, not a negotiation, so calendar it from day one.
What is the difference between IO and adjustable-rate?
IO describes the payment shape; adjustable describes the rate behavior. Most IO loans are also ARMs, but a fixed-rate IO exists at some lenders. Know which risk you are taking: payment recast, rate movement, or both.