Interest-only payment and balloon balance.
M = P × (r / 12)
The monthly interest-only payment is calculated by multiplying the outstanding loan principal by the monthly periodic interest rate. Because no principal is being repaid, the payment stays constant as long as the loan balance and interest rate do not change.
Note: Results are estimates based on the inputs you provide. Actual payments may differ due to lender fees, escrow, insurance, or rate adjustments. Consult your lender for exact figures.
Monthly Rate = 0.06 / 12 = 0.005 M = $400,000 × 0.005 = $2,000.00
Result: Monthly Interest-Only Payment = **$2,000.00**
With a $400,000 loan at a 6% annual interest rate, your monthly interest-only payment is $2,000.00. This means every month you pay $2,000 in interest charges, and your loan balance remains at $400,000 — it does not decrease. When the interest-only period ends (commonly 5–10 years), your payments will rise significantly because you must then repay the full principal over the remaining loan term, in addition to interest.
An interest-only mortgage is a home loan where, for a set initial period (typically 5 to 10 years), the borrower pays only the interest that accrues on the principal each month. The principal balance does not decrease during this phase.
With a conventional amortizing mortgage, each payment covers both interest and a portion of the principal, gradually reducing your balance to zero by the end of the loan term. With an interest-only loan, 100% of each payment goes toward interest — your equity does not build through repayment (though it can still grow if property values rise).
Once the interest-only period ends, the loan recasts. You must now repay the original principal balance PLUS interest over the remaining term. This typically causes a significant payment jump, sometimes called "payment shock." For example, if you had a 30-year loan with a 10-year interest-only period, you must repay the full principal over just 20 years instead of 30 — making each payment considerably larger.
Disclaimer: This calculator provides estimates for educational purposes. It does not constitute financial advice. Consult a licensed mortgage professional or financial advisor before making any borrowing decisions.
An interest-only (IO) loan refers to the payment structure — only interest is paid for a set period. An ARM refers to how the interest rate is set — it adjusts periodically based on a market index. Many IO loans are also ARMs, but they are separate concepts. A fixed-rate mortgage can also have an IO period.
After the IO period, use the standard amortizing payment formula: M = P × [r/12 × (1 + r/12)^n] / [(1 + r/12)^n − 1], where P is the remaining balance (still the original principal if no extra payments were made), r is the annual interest rate, and n is the number of remaining months.
Because you pay no principal during the IO period, those months contribute zero toward loan payoff. You will generally pay more total interest over the life of an IO loan compared to a fully amortizing loan with the same rate and term, since the principal balance remains higher for longer.
No. During the interest-only period, your payments do not reduce the principal, so you build no equity through repayment. Equity can only increase if your property's market value rises.
Most interest-only mortgages have an IO period of 5 to 10 years, after which the loan recasts and you begin making fully amortizing payments that include both principal and interest.
Your monthly payment will increase — sometimes substantially — because you must now repay the entire original principal balance spread across the remaining loan term, in addition to interest charges.
It depends on your financial situation and goals. It can make sense for investors, high-earners with variable income, or short-term ownership plans. However, it carries risks like no equity build-up and payment shock. Always consult a financial advisor.
Many interest-only loans allow voluntary extra principal payments, which would reduce your balance and future payments. Check your specific loan agreement for prepayment terms.
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