Interest Only Calculator – Interest-Only Loan Calculator
Calculate interest-only loan payments and total costs
How to Use
- Enter your total loan amount
- Input the annual interest rate
- Enter the interest-only period in years (e.g., 5 or 10 years)
- Enter the total loan term in years (must be longer than interest-only period)
- Calculate to see monthly payments and total costs
- Compare interest-only loan vs. traditional amortizing loan
What is an Interest-Only Loan?
An interest-only loan allows you to pay only the interest charges for a specified period (typically 5-10 years), without reducing the principal balance. After the interest-only period ends, you must pay both principal and interest, resulting in significantly higher monthly payments.
These loans are common in mortgages, business financing, and construction loans. They offer lower initial payments but ultimately cost more in total interest compared to traditional amortizing loans.
How Interest-Only Loans Work
Interest-only loans have two distinct phases:
| Phase | Duration | Monthly Payment | Principal Balance |
|---|---|---|---|
| Interest-Only Phase | 5-10 years (typically) | Interest only (lower payment) | Unchanged—no principal reduction |
| Amortization Phase | Remaining loan term | Principal + interest (higher payment) | Decreases monthly until paid off |
Example: $300,000 loan at 5% for 30 years with 10-year interest-only period. Years 1-10: $1,250/month (interest only). Years 11-30: $1,931/month (principal + interest on remaining 20-year term).
Advantages and Disadvantages
Advantages of interest-only loans:
- Lower initial monthly payments improve short-term cash flow
- Allows purchasing more expensive property with same monthly budget
- Useful for borrowers expecting income increases
- Benefits investors who plan to sell before amortization phase
- Tax-deductible interest for investment properties or business loans
- Flexibility for self-employed or commission-based earners with variable income
Disadvantages and risks:
- No equity building during interest-only period
- Significantly higher total interest costs over loan lifetime
- Payment shock when amortization phase begins
- Risk of owing more than property value if prices decline
- Harder to refinance if property doesn't appreciate
- Financially dangerous for borrowers who can barely afford interest-only payments
- Vulnerable to interest rate changes if adjustable rate
Who Should Consider Interest-Only Loans?
Interest-only loans may be appropriate for:
- Real estate investors expecting to sell before amortization phase
- High-income borrowers with disciplined financial planning
- Professionals expecting significant income increases (doctors finishing residency, lawyers making partner)
- Business owners with irregular cash flow who want payment flexibility
- Home buyers in appreciating markets planning to sell within 5-10 years
- Borrowers who will invest savings in higher-return opportunities
Interest-only loans are risky for first-time homebuyers, those stretching their budget, or anyone counting on property appreciation to afford future payments.
Frequently Asked Questions
- Do I ever pay down the principal on an interest-only loan?
- Not during the interest-only period—your balance stays the same. After the interest-only period ends, you begin paying both principal and interest, which reduces the balance. Some loans allow voluntary principal payments during the interest-only period, but they're not required.
- Why would someone choose an interest-only loan?
- Lower initial payments free up cash for other investments, businesses, or expenses. Real estate investors may plan to sell before the amortization phase begins. High-earners expecting income growth can afford lower payments now and higher payments later. However, most financial advisors caution against interest-only loans for primary residences.
- What happens when the interest-only period ends?
- Your monthly payment increases dramatically because you must now pay principal plus interest over the remaining loan term. For example, a $400,000 loan at 5% with a 10-year interest-only period jumps from $1,667/month to $2,575/month when amortization begins. Many borrowers plan to refinance or sell before this happens.
- Are interest-only loans dangerous?
- They can be risky, especially for borrowers who can barely afford the interest-only payment. The 2008 financial crisis was partly caused by interest-only and option-ARM loans. Risks include payment shock, no equity building, and potential negative equity if property values decline. Use with caution and have a clear exit strategy.