Use this calculator to quickly determine your monthly interest-only mortgage payment based on the principal loan amount and the annual interest rate. This calculation does not include property taxes, insurance, or principal repayment.
Interest-Only Mortgage Payment Calculator
Your Monthly Interest Payment is:
$0.00Interest-Only Mortgage Payment Calculator Formula
The monthly payment for an interest-only loan is straightforward, calculated by taking the annual interest amount and dividing it by 12 months. This formula is used to solve for the monthly payment (M) when the Principal (P) and Rate (R) are known.
M = (P * R / 100) / 12
Formula Source: Investopedia (Interest-Only Mortgage) | CFPB (Loan Options)
Variables
The calculator uses the following key variables, allowing you to solve for the missing one:
- Loan Principal (P): The total amount of money borrowed for the mortgage.
- Annual Interest Rate (R): The yearly rate of interest expressed as a percentage.
- Monthly Payment (M): The fixed monthly amount paid solely toward the interest accrued on the principal.
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What is an Interest-Only Loan?
An interest-only loan is a mortgage where the borrower is only required to pay the interest that accrues on the principal balance for a specified initial period (typically 5 to 10 years). During this phase, the loan balance remains unchanged because no payments are being applied to the principal itself.
This type of loan is often attractive to investors, those with irregular income streams, or those who anticipate a significant future income increase (e.g., a bonus or sale of another asset). While the initial monthly payments are lower than a traditional mortgage, borrowers must be prepared for “payment shock” when the interest-only period ends and the required payments jump to include principal and interest (P&I) to fully amortize the loan by the end of its term.
How to Calculate Interest-Only Payment (Example)
Follow these steps to calculate the monthly interest-only payment for a $300,000 loan at a 5% annual interest rate:
- Convert the Annual Rate to a Decimal: Divide the annual interest rate by 100. (5% / 100 = 0.05)
- Calculate Annual Interest: Multiply the Loan Principal by the decimal rate. ($300,000 $\times$ 0.05 = $15,000)
- Calculate Monthly Interest Payment: Divide the annual interest by 12 months. ($15,000 / 12 = $1,250)
- Result: The monthly interest-only payment is $1,250.
Frequently Asked Questions (FAQ)
A: No. This calculator is strictly for the interest-only portion of the monthly mortgage payment. It does not include property taxes, homeowners insurance, or other fees (known as PITI).
Q: What happens when the interest-only period ends?A: When the interest-only period expires, the loan converts to a fully amortizing schedule. Your monthly payments will increase significantly as they begin to include both principal and interest, aiming to pay off the remaining balance by the original maturity date.
Q: Can I pay down the principal during the interest-only period?A: Yes, most lenders allow voluntary principal payments during this phase. This is often a wise strategy as it reduces the loan balance, thus lowering the subsequent interest calculation and reducing the overall loan cost.
Q: Is an interest-only loan cheaper than a traditional loan?A: The total cost of an interest-only loan is generally *higher* than a traditional loan because you are paying interest on the full principal for a longer period. However, the *initial* monthly payments are lower.