Interest-Only Mortgage Calculator

An interest-only (IO) mortgage has two phases. During the IO period — typically 5 to 10 years — your monthly payment covers only interest, so the outstanding balance stays at the full original loan amount. When the IO period ends, the loan converts to a standard principal-and-interest schedule for the remaining term, and your payment rises to amortize the entire balance over those years. The CFPB notes that 'the amount that you owe on the loan does not go down with each payment' during the IO phase.

Two reasons combine: you are now repaying principal (which you did not pay during the IO phase) and you are doing so over a shorter remaining term. For example, a 30-year loan with a 10-year IO period leaves only 20 years to repay the full balance, versus 30 years on a standard mortgage. This compressed amortization drives the 'payment shock' — the jump from IO payment to the higher P+I payment.

The formula is straightforward: IO payment = Loan amount × (Annual rate / 12). For a $400,000 loan at 6.5% annual rate, IO payment = 400,000 × (0.065 / 12) = $2,166.67. The balance does not change during this phase.

The standard amortization formula is applied to the full original balance over the remaining months: M = P × i × (1+i)^m / ((1+i)^m − 1), where i = annual rate / 12 and m = remaining months after the IO period. For $400,000 at 6.5% with 20 years (240 months) remaining, M ≈ $2,982.29.

You do not build equity through loan paydown — every IO payment is pure interest and the balance stays at the original principal. You may gain equity if the property appreciates in market value, but that is independent of the mortgage structure. Any equity built from appreciation can be lost if the market falls, since you carry the full loan balance throughout the IO phase.

An interest-only mortgage can lower the required payment during the IO phase, which may help cash flow in the early years. However, it comes with real risks: no principal paydown means no amortization-based equity, a potentially large payment jump at reset, and higher total interest paid over the life of the loan compared with a standard amortizing mortgage. The CFPB recommends not assuming you will be able to refinance or sell before the payment increase occurs. Whether it suits your situation depends on your income trajectory, how long you plan to hold the property, and your risk tolerance.

An interest-only mortgage always costs more in total interest than a standard amortizing loan at the same rate and term, because the full principal is outstanding and accruing interest for the entire IO period. The additional interest equals (IO monthly payment × number of IO months) minus what a standard amortizing loan would have paid in interest over the same period. For a $400,000 loan at 6.5% over 30 years with a 10-year IO period, total interest paid is materially higher than on a conventional 30-year fixed.

If the higher P+I payment is unaffordable when the IO period ends, your options typically include refinancing into a new loan (if your credit and equity position qualify), making extra principal payments during the IO phase to reduce the balance before conversion, or selling the property. The CFPB specifically warns borrowers not to assume refinancing will be available — market conditions, property values and your financial situation may all change. This calculator does not model refinancing scenarios.

These are often combined but are distinct features. An ARM adjusts its interest rate at specified intervals, which changes both the IO payment and the amortizing payment. This calculator models a fixed rate throughout — it shows the payment jump caused purely by the IO-to-amortizing conversion, not any additional rate-change shock. Real IO mortgages are frequently 5/1 or 7/1 ARMs, where the rate also resets after the fixed intro period, compounding the payment change.

Most IO mortgages permit voluntary extra principal payments during the IO phase, which reduce the outstanding balance and therefore the base for both the IO payment and the later amortizing payment. This calculator assumes no extra payments. If you want to model early payoff with extra payments on a fully-amortizing loan, use the Loan Payoff Calculator.

A longer IO period means more months of pure-interest payments on the full balance, increasing total interest paid. It also compresses the remaining amortization into fewer months, which raises the post-IO monthly payment further. For example, a 10-year IO period on a 30-year loan leaves 20 years to amortize; a 15-year IO period leaves only 15 years, driving the P+I payment even higher. Use this calculator to compare multiple IO period lengths before choosing.

No — this calculator outputs the principal-and-interest portions only. Your actual monthly housing cost will be higher once you add property taxes, homeowners insurance, and, if applicable, private mortgage insurance (PMI) and HOA fees. For a full PITI estimate on a standard mortgage, use a full mortgage calculator.