Interest-Only Mortgage

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This interest-only mortgage calculator provides an amortization schedule of monthly payments with a breakdown in interest and principal payments. To calculate the payments required throughout the life of the loan, the following information is required: loan term, interest-only term, loan value and interest rate.

Inputs
$
years
years
%
Results
Only Interest Payments
$416.67
Interest and Principal Payments
$610.41
$203,052.16
Total Cost
49%51%
Total Principal$100,000
Total Interest$103,052.16

How to Calculate an Interest-Only Mortgage

An interest-only mortgage is very similar to a standard mortgage. The payments for this kind of mortgage can be split into two different periods: interest-only period and amortization period. Even though both periods have different monthly payments, they can be calculated using simple formulas.

Interest-Only Payments

Interest-only payments are very easy to calculate because a borrower pays only interest accrued on a loan over that time. This means that the loan principal does not change over the interest-only period. To calculate monthly interest-only payments, you need to know the loan principal and interest rate on the loan. Using the following formula, you can easily calculate monthly payments required to cover the interest-only portion of the loan.

Monthly Interest Only Payments Formula

The formula may yield a number with more than 2 decimal places. Since monthly interest-only payments are paid in US dollars, it is important to round the result to the nearest cent or 2 decimal places. Monthly interest-only payments are paid every month for the whole interest-only term. This means that if the interest-only term is 5 years, then you have to pay monthly interest-only payments for the first 5 years or 60 months of the loan.

Amortizing Payments

After the interest-only loan term expires, you have to amortize the remaining principal over the remaining lifetime of the loan. It takes an extra step to calculate the monthly payments required for this part of the loan, but it is still very simple. First, you need to calculate how many years are left until the loan is repaid. It can be calculated by simply subtracting the interest-only term from the total loan term.

Amortizing Loan Term Formula

When the amortizing loan term is found, you can easily calculate the monthly payments required for the remaining loan term. The remaining monthly payments must be bigger than the only-interest monthly payments because the remaining monthly payments include interest payments and principal amortization. The following formula can be used to calculate the amortizing monthly payments.

Amortizing Monthly Payments Formula

When the amortizing monthly payments are found, it is possible to calculate the total cost of the loan by simply adding up all monthly payments. In the case of interest-only loans, the total cost can be calculated by multiplying monthly only-interest payments by the number of months in the only-interest term, multiplying monthly amortizing payments by the number of months in the amortizing term, and adding them up.

What Is an Interest-Only Mortgage?

An interest-only mortgage is a special type of mortgage where a borrower pays only interest on the loan principal for the first few years before it starts amortizing. An only-interest payment period usually lasts for 5 - 10 years. After that, the mortgage starts to amortize the same way as a conventional mortgage. The maximum mortgage term for these loans is 30 years. For example, if a borrower gets an interest-only mortgage for 30 years with an interest-only period of 10 years, the borrower pays only interest for the first 10 years and then pays off the whole principal for 20 years.

Our calculator allows you to estimate the amortization of interest-only mortgage based on the loan term, interest-only term, loan value, and interest rate. The main difference between an interest-only mortgage calculator and a conventional mortgage amortization calculator is the fact that the borrower pays off only interest for some time before starting to pay off the principal. In this case, the borrower has lower monthly payments at the beginning that come at a cost of larger payments later in the lifetime of the mortgage. As a rule of thumb, an interest-only mortgage is more expensive than a regular mortgage because an interest-only mortgage principal earns interest but is not amortized for some time.

Who Should Consider an Interest-Only Mortgage?

An interest-only mortgage may look like an attractive option for people who are looking to have lower monthly payments, but the payment structure is deceiving. It is important to remember that monthly mortgage payments will increase dramatically when the interest-only period expires. Additionally, the total cost of an interest-only mortgage is higher than that of a regular mortgage because of all the extra interest paid over time. Because of these characteristics, an interest-only mortgage may not be a great option for individuals who have a stable income and are not willing to overpay in interest. On the other hand, people who have a variable income and a small amount of savings may benefit from this type of mortgage.

An interest-only mortgage allows a borrower to bypass high monthly payments for some time and pay more in the future. This means that the borrower may expect lower payments in the near future and higher payments later on. If a borrower does not have a stable income at the moment but expects their income to grow higher in the future, they may be able to benefit from this type of mortgage. This type of borrower may be a benefit because the mortgage allows them to pay less in the beginning and pay more in the future. If the borrower expects their income to increase to the point that they can cover their future mortgage payments, then they should consider an interest-only mortgage to a regular mortgage.

If a borrower has a stable job and a steady income with some savings, they may not be better off getting an interest-only mortgage. An interest-only mortgage is more expensive than a regular mortgage because there is much more interest accrued over time. If the borrower can pay off the mortgage without any delays in payments, then an interest-only mortgage will not provide any benefit, but it will come at a higher cost.

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