Use this simple and accurate Interest-Only Mortgage Calculator to quickly determine your monthly payment amount based on the loan principal and annual interest rate.
Interest-Only Mortgage Calculator
Your Estimated Monthly Interest-Only Payment
$0.00Calculation Details
Enter the values and click ‘Calculate’ to see the detailed steps.
Interest-Only Mortgage Calculator Formula
Monthly Payment = (Principal × Annual Interest Rate) / 12
Formula Source: Investopedia – Interest-Only Mortgage
Variables Explained
The calculator uses three primary variables to determine your monthly interest-only payment:
- Loan Principal ($): The initial amount of money borrowed for the mortgage. This is the amount on which interest is calculated.
- Annual Interest Rate (%): The percentage rate charged by the lender for the loan, expressed annually. It must be converted to a decimal for the calculation.
- Loan Term (Years): The total length of the mortgage agreement. While this doesn’t affect the initial interest-only payment amount, it defines the period over which this payment structure is valid.
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What is an Interest-Only Mortgage?
An interest-only mortgage is a type of home loan that requires the borrower to pay only the interest on the principal loan amount for a specific period of time (the “interest-only period”). During this time, the principal balance does not decrease. This payment structure results in significantly lower monthly payments compared to a traditional amortizing mortgage.
These loans are often utilized by real estate investors or borrowers expecting a significant increase in future income. Once the interest-only period ends (typically after 5 or 10 years), the borrower must begin making principal and interest payments, which dramatically increases the monthly payment amount, often leading to “payment shock.”
How to Calculate Interest-Only Mortgage Payments (Example)
Follow these steps to calculate the monthly interest-only payment for a loan of $400,000 at a 5% annual interest rate:
- Convert the Annual Rate to Decimal: Divide the percentage rate by 100. (5% / 100 = 0.05).
- Determine the Annual Interest Amount: Multiply the Principal by the Decimal Rate. ($400,000 × 0.05 = $20,000).
- Calculate the Monthly Payment: Divide the Annual Interest Amount by 12 (months). ($20,000 / 12 = $1,666.67).
- The interest-only mortgage payment for this example is $1,666.67 per month.
Frequently Asked Questions (FAQ)
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What happens after the interest-only period ends?
After the interest-only period, payments will increase sharply as the borrower must begin paying both the interest and the principal balance, often over a shorter remaining term.
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Are interest-only mortgages riskier than traditional mortgages?
They can be. The primary risk is negative amortization (where the principal balance increases) or “payment shock” when the monthly obligation rises significantly after the interest-only period.
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Does this calculator include property tax or insurance?
No. This calculator provides only the principal and interest portion (specifically, just the interest) of the payment. Property taxes, insurance, and HOA fees (PITI components) are separate and must be added to get the full monthly housing cost.
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Is the principal balance paid down during the interest-only period?
No, the principal balance remains unchanged during the interest-only period, unless the borrower chooses to make optional principal payments.