Transparent method
The formula
Worked example
Example inputs
How to interpret the result
The interest-only period's payment is genuinely lower, and it's easy to mistake that for real affordability rather than deferred cost. Nothing paid during that stretch touches the principal balance, so the day the loan converts to amortizing, the payment jumps to cover the same balance over a shorter remaining term than a loan that had been paying down principal the whole time.
Before you rely on it
What to check
Calculate the post-conversion payment now, at today's rate assumptions, rather than waiting until the interest-only period actually ends to find out.
The common error
Where people go wrong with interest-only mortgage calculator
Budgeting around the interest-only payment as if it were permanent. The jump at conversion is often substantial, and planning only for the lower number leaves no room to absorb it when it arrives.
Sensitivity evidence
How annual interest rate changes the interest-only payment
| Annual interest rate | Interest-only payment | Later amortizing payment |
|---|---|---|
| 4.8% | $1,583 | $2,585 |
| 5.8% | $1,917 | $2,808 |
| 6.8%worked example | $2,250 | $3,041 |
| 7.8% | $2,583 | $3,284 |
| 8.8% | $2,917 | $3,535 |
Every input, tested
Which input moves the interest-only payment most
| Input | Tested from | To | Interest-only payment at each end | Swing |
|---|---|---|---|---|
| Annual interest rate | 5.8% | 7.8% | $1,917 to $2,583 | $667 (30%) |
| Loan amount | $360,000 | $440,000 | $2,025 to $2,475 | $450 (20%) |
| Interest-only period | 7.0 years | 13.0 years | $2,250 to $2,250 | none |
| Total term | 22.0 years | 38.0 years | $2,250 to $2,250 | none |
Two variables at once
Interest-only payment by annual interest rate and loan amount
| Annual interest rate \ Loan amount | $320,000 | $400,000 | $480,000 |
|---|---|---|---|
| 4.8% | $1,267 | $1,583 | $1,900 |
| 5.8% | $1,533 | $1,917 | $2,300 |
| 6.8% | $1,800 | $2,250 | $2,700 |
| 7.8% | $2,067 | $2,583 | $3,100 |
| 8.8% | $2,333 | $2,917 | $3,500 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Loan amount | $400,000 |
| Annual interest rate | 6.8% |
| Interest-only period | 10.0 years |
| Total term | 30.0 years |
| Interest-only payment | $2,250 |
| Later amortizing payment | $3,041 |
Where the inputs come from
Loan amount, rate and total term come from the loan estimate. The interest-only period is how many years you pay interest alone, typically five to ten; the remaining years amortize the full principal. Confirm whether the rate is fixed during the interest-only phase or adjustable, and whether the later payment is recalculated at a new rate.
When the result stops applying
Interest-only mortgages are less common after the 2008 rule changes and are not qualified mortgages, so they are usually offered as jumbo or non-QM loans with stricter requirements. If the rate adjusts, the later payment can be higher than shown. Making principal payments during the interest-only years removes some of the shock.
What to compare it with
Consider what you plan to do at the end of the interest-only period: sell, refinance, pay off with a lump sum or start amortizing. Each has a risk, so check a scenario where the home is worth less and rates are higher. Compare with a standard loan and its payment. The mortgage payoff calculator shows the effect of paying principal during the interest-only years, which reduces the shock at the reset and builds equity earlier.
People also ask
Frequently asked questions
Do I build equity during the interest-only period?
Only if the property rises in value or you pay extra principal. Scheduled payments do not reduce the balance.
What happens when the interest-only period ends?
The loan begins amortizing, meaning you start paying principal, over the years that remain, so the payment jumps. On the example, it rises from about $2,250 to roughly $3,040 because the same $400,000 must be repaid in 20 years.
Who uses interest-only loans?
Borrowers with variable income, real estate investors and those planning to sell or refinance before the payment resets, since the structure lowers early payments.