Interest-only loan calculator guide
During an interest-only period, scheduled payments cover interest but do not reduce principal. When amortization begins, the unchanged balance must be repaid over fewer years.
The later payment can rise sharply even when the interest rate does not change. Adjustable rates can add further risk.
How to use the interest-only loan calculator
- Enter principal and rate: Use the balance and current note rate.
- Enter both phases: Separate interest-only years from repayment years.
- Review payment increase: Stress-test the later amortizing payment.
- Plan for rate changes: Review adjustable-rate terms separately.
Formula and variables
After the initial phase, the full principal amortizes over the remaining repayment period.
Interest-only payment = principal × annual rate ÷ 12- IO period — Interest-only years
- Time with no scheduled principal reduction.
- Repayment term — Amortizing years
- Remaining time to repay principal.
Worked example: payment recast
A $500,000 loan is interest-only for 10 years, then amortizes for 20.
- Rate
- 6.5%
- Pay monthly interest for 10 years.
- Principal remains $500,000.
- Amortize it over 20 years.
Result: The later payment is materially higher
Affordability should be tested against the later phase.
Understanding your results
Payment increase
Difference between initial interest-only and later amortizing payments.
Total interest
Interest across both modeled phases.
Assumptions
- Rate remains fixed.
- No optional principal is paid during the initial phase.
Limitations
- Adjustable-rate caps and resets are excluded.
- Taxes, insurance, and fees are excluded.
Common mistakes
- Assuming the principal declines.
- Budgeting only for the initial payment.
- Assuming refinancing will be available.
Practical use cases
Compare repayment choices
Change one assumption at a time and compare total cost as well as the monthly payment.
Plan before borrowing
Estimate the future obligation before accepting loan terms.
Planning and decision guide
Qualify the later payment in your own budget
Do not rely solely on the lower introductory payment.
Understand rate-reset risk
Many interest-only products can also have adjustable rates.
Optional principal changes the outcome
If allowed, principal payments during the initial phase can reduce the later payment.
Frequently asked questions
Does an interest-only payment reduce principal?
Not unless you voluntarily pay additional principal.
Why does the payment increase later?
The full balance must amortize over the shorter remaining period.
Can I refinance before recast?
Possibly, but approval and market terms are not guaranteed.
Does the calculator include taxes and insurance?
No. It models loan principal and interest.
Sources and review
- What is an interest-only mortgage? — Consumer Financial Protection Bureau. Accessed 2026-07-10.
Reviewed 2026-07-10.