Interest-Only Mortgage Calculator
Compare interest-only payments during the initial period versus fully amortizing payments, and see the payment jump when the interest-only period ends.
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How It Works
An interest-only mortgage allows you to pay only interest for an initial period (typically 5-10 years), resulting in lower monthly payments. After the interest-only period ends, the loan converts to a fully amortizing loan for the remaining term, causing a significant payment increase because you must now pay down the full principal in fewer years.
The Formula
Post-IO Payment = P[r(1+r)^m] / [(1+r)^m - 1] where m = remaining months
Variables
- IO Payment — Monthly interest-only payment = principal x (annual rate / 12)
- Post-IO Payment — Payment after IO period ends, amortized over the remaining term
- Payment Jump — The increase in monthly payment when IO period ends
Worked Example
A $400,000 loan at 6.5% with a 10-year IO period on a 30-year term: IO payment = $400,000 x 0.065/12 = $2,167/month. After 10 years, the remaining 20 years must fully amortize $400,000, so payment jumps to $2,984/month - an increase of $817 (38%). A standard 30-year payment would be $2,528.
Practical Tips
- Interest-only mortgages can be useful if your income is expected to increase significantly or if you are investing the savings at a higher return.
- You build zero equity during the interest-only period (aside from home price appreciation), which is risky if home values decline.
- Many borrowers refinance before the IO period ends to avoid the payment shock. Make sure you have a clear exit strategy.
- You can voluntarily make principal payments during the IO period to reduce the eventual payment jump.
- Interest-only loans are more common for jumbo mortgages and high-net-worth borrowers. They are harder to qualify for after the 2008 financial crisis regulations.
Frequently Asked Questions
What happens when the interest-only period ends?
Your payment increases because you must now pay both principal and interest, amortized over the remaining loan term. For example, a 30-year loan with a 10-year IO period becomes a 20-year amortizing loan, causing a substantial payment jump.
Do I build any equity with an interest-only mortgage?
During the interest-only period, you build no equity through payments. Your only equity comes from your down payment and any home price appreciation. Once payments switch to fully amortizing, you begin building equity normally.
Who should consider an interest-only mortgage?
They may suit borrowers with irregular income (sales commissions, bonuses), those who plan to sell before the IO period ends, or investors who want to maximize cash flow. They are not recommended for buyers who plan to stay long-term without a clear plan for the payment increase.
Can I make principal payments during the IO period?
Yes, most interest-only mortgages allow voluntary principal payments. This reduces your balance and lowers both your future IO payments and the eventual amortizing payment.
Are interest-only mortgages still available?
Yes, but they are less common after the 2008 financial crisis. They are primarily available through portfolio lenders and private banks, often for jumbo loans. Qualification requirements are stricter than for standard mortgages.