Interest-Only Mortgage Calculator
An interest-only (IO) mortgage payment covers only the interest due each month — none of your payment reduces the principal balance during the IO period, which typically lasts 5 to 10 years. The calculator above shows the principal-and-interest payment for your loan; your IO payment is simply the monthly interest portion alone (loan balance × annual rate ÷ 12). When the IO period ends, the full remaining balance — unchanged from day one — amortizes over the remaining term, causing a significant payment increase. The critical risk: because IO loans build zero equity during the IO period, a drop in home values can leave you underwater with no equity buffer.
How it's calculated
During the interest-only period, your monthly payment equals loan balance × (annual interest rate ÷ 12). On a $400,000 loan at 6.75%, that is $400,000 × (0.0675 ÷ 12) = $2,250 per month. You pay $2,250 every month for the IO period and still owe $400,000 when it ends.
After the IO period, the full balance must amortize over the remaining term. If you had a 30-year IO loan with a 10-year IO period, the $400,000 balance amortizes over the remaining 20 years (240 months) at the then-current rate. At 6.75%, that payment jumps to $3,044 per month — a 35% increase. If the loan is also adjustable-rate, the rate may be higher at that point, compounding the payment shock.
Total interest paid over the life of an IO loan significantly exceeds that of a fully amortizing loan because no principal reduction occurs during the IO period, so you pay interest on the full balance for those years.
A worked example
You take a $400,000 IO loan at 6.75% with a 10-year IO period followed by a 20-year fully amortizing period. During the IO period: $400,000 × (0.0675 ÷ 12) = $2,250 per month for 120 months = $270,000 in interest paid, principal balance still $400,000. After IO period: $400,000 amortizes over 240 months at 6.75%, giving a payment of $3,044 per month. Total interest during amortization period: $330,560. Grand total interest: $600,560 — compared to $562,072 for a standard 30-year fully amortizing $400,000 loan at 6.75% (which has a constant payment of $2,594). The IO loan costs $38,488 more in total interest and carries far more risk.
Common mistakes to avoid
- Treating the IO payment as your long-term budget. The low IO payment lasts only 5–10 years. Plan for the post-IO payment — which can be 25–40% higher — before you commit.
- Assuming the home will appreciate enough to cover the lack of equity build. IO loans became widespread before 2008 on this assumption. Home prices fell instead, leaving many IO borrowers deeply underwater.
- Not reading whether the loan is fixed or adjustable. Most IO loans are adjustable-rate (ARM) products. The rate can rise at the IO-period end, which can compound the payment jump beyond what a fixed-rate IO would produce.
- Forgetting that selling costs eat into zero-equity positions. If you sell during the IO period, you owe the full original balance. After subtracting realtor fees (typically 5–6%) and closing costs, you may need to bring cash to closing.
- Comparing the IO payment to a fully amortizing payment without accounting for total interest. An IO loan looks cheaper monthly but costs significantly more over 30 years because interest runs on the full balance for a decade longer.
Frequently asked questions
What is an interest-only mortgage?
An interest-only mortgage requires you to pay only the interest owed each month for a set period — typically 5 to 10 years. None of your payment reduces the loan balance. After the IO period ends, the full original balance amortizes over the remaining term, causing your payment to increase substantially.
How much does the payment increase after the IO period?
The increase depends on your loan amount, rate, and remaining term. On a $400,000 loan at 6.75%, the IO payment is $2,250. After a 10-year IO period, the fully amortizing payment over the remaining 20 years jumps to $3,044 — a 35% increase. If the rate is also adjustable, the jump can be larger.
Do interest-only loans build equity?
No. During the IO period, your balance does not decrease, so you build zero equity through loan paydown. Any equity gain comes solely from home price appreciation. If prices fall, you lose equity — or go underwater — with no principal reduction to cushion the loss.
Who benefits from an interest-only mortgage?
IO loans can make sense for borrowers with irregular income (such as commissioned salespeople or investors) who expect large periodic income windfalls to pay down principal, or for short-term holds where the buyer plans to sell before the IO period ends. They require careful planning and carry meaningful risk.
How do I calculate my interest-only payment?
Multiply your loan balance by your annual interest rate, then divide by 12. For example: $400,000 × 6.75% ÷ 12 = $2,250 per month. Use the calculator above to find your post-IO fully amortizing payment, which you can compare to your IO payment to plan for the transition.