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Payment Summary
Interest-Only Period
Monthly Payment
$0
Total Interest
$0
Principal & Interest Period
Monthly Payment
$0
Total Interest
$0
Loan Summary
Total Interest Paid
$0
Total Amount Paid
$0
Enter your loan details to calculate payments for an interest-only loan:
An interest-only loan is a type of financing where the borrower pays interest only for a set period such as 5 to 10 years. During this introductory period, the loan's principal balance remains unchanged. After the interest-only payment period ends, the loan moves to a fully amortizing loan and has payments which include principal and interest. The payments this period tend to be higher since it includes principal and interest. Interest-only loans are used for mortgages, investment properties, and business financing to provide short term relief due to the lower initial payments. See the CFPB explanation of interest-only mortgage loans for more context on how the interest-only period and repayment transition work.
The benefit of an interest-only loan is the lower monthly payment during that period. This payment can keep the borrower's cash flow flexible to allow for short, medium, or long-term reinvestments or expenses. There can be drawbacks to taking a loan like this. By paying nothing toward principal, the borrower builds no equity in the property. When the interest-only period ends, the increase in payments can strain unprepared borrowers. There is also the risk the asset's value declined resulting in negative equity.
Calculating a payment for an interest-only loan is fairly straightforward. To calculate a monthly interest-only payment, multiply the loan amount by the annual interest rate and divide that result by twelve. For example, the annual payment for a loan amount of $300,000, with an annual interest rate of 5 percent (0.05) would be calculated as $300,000 x 0.05 = $15,000. The monthly interest-only payment would be $15,000 / 12 = $1,250.
Borrowers with atypical financial strategies and/or timelines can benefit from an interest-only loans. Time-sensitive real estate investors often prefer interest-only loans. The reduced payment helps them finance their investment while the property appreciates or generates rental cash flow. Individuals expecting to own a property for a limited time such as people who may be selling or relocating within a few years may have little purpose for building equity in the time period so an interest-only loan may be ideal. Individuals with more earnings potential in their future may opt for an interest-only loan. Business owners may opt for this type of loan to keep cash available and reinvest it into their operations in the early years of the loan.
Interest-only loans are used when a borrower is seeking short-term cash flow or believes they will refinance or sell their house prior to the interest-only period ending. For example, it is common in the real estate flipping business where the investor purchases a property, renovates the house, and sells it shortly afterward within the interest-only period. For bridge financing scenarios where a homeowner sells their home but it hasn't closed yet, they may select an interest-only loan to purchase another property. Buyers seeking high or luxury real estate may also utilize interest-only loans to keep their monthly loan payments low, especially if they expect to receive a commission or a sale on another investment. Buyers of commercial properties and/or developers might be interested in keeping their payments low, because cash preservation is key in the start-up growth of a business and/or property.
When the interest-only period ends, the loan now takes on a fully amortized structure. The borrower pays interest and principal over the remaining term of the loan. Some borrowers refinance into another loan with new terms, while others may choose to sell the property if the new payments are beyond the borrower's reach. It is critical that borrowers are prepared for the shift from interest-only payments to fully amortizing monthly payments before the interest-only payment period expires!
One of the most significant risks of interest-only loans is the jump in monthly payments when principal repayment begins. This is sometimes called "payment shock," a term used by the CFPB to describe the payment increase borrowers face when the interest-only period ends and the loan begins fully amortizing over the remaining term.
This jump is compounded by the fact that the borrower has built zero equity during the interest-only period. If property values have declined or stayed flat, the borrower may owe more than the property is worth when the amortization period begins.
| Loan Type | Loan Amount | Rate | Monthly Payment (Year 1) | Total Interest Paid |
|---|---|---|---|---|
| 30-Year Fixed (fully amortizing) | $400,000 | 6.5% | $2,528 | ~$510,000 |
| 10-Year I/O then 20-Year Amortizing | $400,000 | 6.5% | $2,167 | ~$583,000 |
The interest-only version saves $361/month in the early years but costs approximately $73,000 more in total interest over the life of the loan, assuming no refinance or sale.
On the same $350,000 loan at 7%:
The interest-only borrower saved $287/month for years 1–10 but must pay $396/month more for years 11–30, and has built zero equity in the first 10 years. This trade-off only makes sense if the cash flow savings were productively deployed or the property was sold.
Compare scenarios carefully with our Mortgage Payment Calculator before deciding between interest-only and fully amortizing options.
This calculator is based on standard financial formulas for interest-only loan payments and fully amortizing loan payments, and compares the two payment structures over the life of a loan. The Homebase Calculators Editorial Team reviews formulas, assumptions, and explanatory content for consistency and clarity. The sources below are provided for educational grounding and deeper reading on interest-only loans, amortization, and mortgage payment structure.
These resources can help you compare loan types, prepare for potential payment changes, and evaluate mortgage options for your financial situation.
For a full comparison against a traditional mortgage, use our Mortgage Payment Calculator.
Review interest-only loan terms, repayment phase structure, total cost of borrowing, and suitability for your financial profile with a licensed lender or financial advisor before committing to a loan product. Interest-only loans carry specific risks that vary by lender and term structure.
A HUD-approved housing counselor can provide free or low-cost guidance on loan type selection and homebuying readiness.
An interest-only loan is a type of financing where the borrower pays only interest for a set period of time.
To calculate a monthly interest-only payment, multiply the loan amount by the annual interest rate and divide that result by twelve. For example, the annual payment for a loan amount of $300,000, with an annual interest rate of 5 percent (0.05) would be calculated as $300,000 x 0.05 = $15,000. The monthly interest-only payment would be $15,000 / 12 = $1,250.
The benefit of an interest-only loan is the lower monthly payment during the interest-only period. This payment can keep the borrower's cash flow flexible to allow for short, medium, or long-term reinvestments as well as expenses. This can be particularly beneficial for real estate investors, business owners, or those expecting higher income in the future.
By paying nothing toward the principal amount of the loan during the interest-only period, the borrower builds no equity in the property. When the interest-only period ends, the increase in payments can strain unprepared borrowers. There is also the risk that the asset's value may have decreased resulting in negative equity. Lastly, the total interest paid over the life of the loan is typically higher than with a traditional mortgage.
Interest-only loans can benefit real estate investors who need lower payments while properties appreciate or generate rental income. They can also be suitable for individuals expecting to own a property for a limited time, people who anticipate higher income in the future, or business owners who need to keep cash available to reinvest in their operations during the early years of the loan.
When the interest-only period ends, the loan typically converts to a fully amortizing structure where the borrower pays both principal and interest over the remaining term of the loan.
Interest-only loans are most commonly available for residential, investment, and commercial real estate properties. They may be more difficult to obtain for primary residences.
Payment frequency (e.g. weekly, bi-weekly, or monthly) affects how interest accrues and how payments are calculated. More frequent payments can slightly reduce the total interest paid over the life of the loan. For example, bi-weekly payments result in 26 half-payments per year (equivalent to 13 monthly payments) instead of 12 monthly payments, which can lead to faster principal reduction once the interest-only period ends.
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