An interest-only (IO) loan lets you borrow a lump sum and pay only the financing charge — the interest — for a set number of years, while the original principal stays untouched. The monthly bill looks small, but the full principal comes due later, either as a one-time balloon payment or as a sharp recast into a fully amortizing loan. This calculator shows both sides of that trade: your low payment today, and the much larger number waiting for you at the end of the interest-only period.
Slide the controls and the result card updates instantly. You can see exactly how much your payment jumps when the interest-only years end, how much interest you have burned without building any equity, and how the loan compares against a regular amortizing mortgage or personal loan of the same size.
How to Use
- Enter the Loan Amount — the principal you intend to borrow. This is the balance that will still be owed on the day the interest-only period ends.
- Set the Interest Rate (APR). Interest-only products often price a little above standard loans because the lender is not reducing its risk as you pay; testing a range of rates shows how sensitive the low opening payment is.
- Choose the Interest-Only Period — the number of years during which your payment covers interest only. Common choices are 5, 7, or 10 years on mortgages; 3 to 10 years on balloon business loans.
- Set the Amortization After IO Period. If you plan to refinance or recast into a regular loan once the IO period ends, this is how many years you will then take to pay the principal down. Leave it at the default to model a 25-year tail.
- Read the result card. The highlighted line is your Monthly Payment During IO Period; below it you will see the balloon principal due, the higher payment after recast, and the total interest you will pay.
The single most important number on the card is the Payment Jump When IO Period Ends. A loan that felt affordable at $667 a month can become uncomfortable overnight when it recasts, so budget for the second number, not the first.
The Interest-Only Formula
During the interest-only period, the math is deliberately simple:
IO Monthly Payment = Principal × (Annual Rate ÷ 12)
There is no principal component, so the balance does not move. Borrowing $100,000 at 8% costs $100,000 × 0.08 ÷ 12 = $666.67 every month, and after 60 monthly payments you still owe the entire $100,000.
When the IO period ends and the loan recasts, the remaining principal is paid down with the standard amortization formula used by every major lender:
Post-IO Payment = P × r(1 + r)ⁿ / ((1 + r)ⁿ − 1)
Where P is the still-outstanding principal, r is the monthly rate, and n is the number of remaining monthly payments. On the same $100,000 at 8% recast over 25 years, the payment jumps to about $771.82. Over the full life, you will have paid roughly $40,000 of pure interest during the IO years plus about $131,545 of interest during the amortization tail — about $171,545 in total interest, with zero equity built until the recast.
If the rate is 0%, the engine skips the division-by-zero edge case and simply splits the principal evenly across the remaining months, because there is no interest to charge.
Why Payments Start Low Then Spike
The appeal of an interest-only loan is cash flow. On a $100,000 loan at 8%, a regular 30-year amortizing payment is about $734 a month. For the first five years an IO loan asks only $667 — a small relief on its own, but the real difference shows up on larger balances. On a $500,000 loan the opening IO payment is near $3,333 versus roughly $3,664 amortizing, freeing up hundreds of dollars a month.
The catch is entirely on the back end. Because you have not touched principal for five years, the recast payment is calculated on the full original balance over a shorter remaining term. On the $100,000 example, the payment does not rise gradually — it jumps from $667 to $771 in a single month, and on a larger balance the jump can be several hundred dollars. If your plan depends on refinancing, selling, or rising income to handle that recast, you are carrying extra risk that a standard amortizing loan does not have.
When an Interest-Only Loan Makes Sense
IO loans are not automatically a bad idea. They fit situations where your income is uneven but expected to rise — for example commissioned salespeople, self-employed borrowers showing strong future earnings, or investors who plan to flip or refinance within the IO window. They also help buyers stretch to qualify in high-cost markets early on. What they do not do is build equity: every dollar you pay during the IO period is pure financing cost, and if the asset value falls you can owe more than the loan is worth.
Examples
Example 1 — The textbook $100,000 loan. Borrow $100,000 at 8% with a 5-year interest-only period, then amortize the balance over 25 years. During the IO years your payment is $666.67/month, totaling $40,000 of interest and no principal reduction. At the recast the balance is still exactly $100,000, and the payment becomes $771.82/month — a jump of about $105. Compare that with a regular 30-year amortizing loan on the same terms, which costs $733.76/month from day one but builds equity the whole way.
Example 2 — The balloon business loan. A small business borrows $250,000 at 7% on a 10-year interest-only schedule designed to be refinanced. The monthly IO payment is $1,458.33, and after 10 years of on-time payments the owner still owes the full $250,000 as a balloon due. If the refinance fails to materialize, recasting over 20 years pushes the payment to roughly $1,938/month — a useful number to know before signing.
Example 3 — A seven-figure balance. On a $1,000,000 loan at 6.5% with a 10-year IO period, the opening payment is $5,416.67/month, rising to about $7,456/month when the balance recasts over the remaining 20 years. Running this stress test before you commit shows whether the higher post-IO payment fits your budget, rather than discovering it a decade in.
FAQ
How is an interest-only loan payment calculated?
The monthly IO payment is simply the principal times the annual interest rate divided by 12. There is no principal component, so the balance stays flat for the entire IO period. After the IO period ends, the remaining principal is amortized with the standard PMT formula over the remaining years, which is what causes the payment to jump.
What is the balloon payment on an interest-only loan?
The balloon principal due at the end of the interest-only period is exactly the original loan amount, because none of your IO payments reduced the balance. On a $100,000 loan, you still owe $100,000 after five or ten years of paying only interest. Some loans require this as a one-time lump sum; others automatically recast into a regular amortizing payment.
Is an interest-only loan cheaper than a regular mortgage?
No. Over the full life, an interest-only loan usually costs more in total interest because you are paying interest on the full principal for longer. The monthly payment is lower during the IO period, but you build no equity then, and the recast payment is higher. IO loans improve short-term cash flow at the cost of higher long-term interest and more risk.
What happens when the interest-only period ends?
Your loan does not disappear. Two things can happen: either you must refinance, sell the asset, or pay the full principal as a balloon, or the loan automatically recasts into a fully amortizing payment that pays down the remaining balance over the agreed tail term. Either way, your monthly bill almost always rises substantially.
Are interest-only mortgages risky?
They carry more risk than standard amortizing mortgages. The payment can recast higher, you build no equity during the IO period, and if home prices fall you can be underwater. They work best for borrowers with variable but rising income, a clear exit plan (sale or refinance), and the discipline to save the difference between the IO and amortizing payment.
Can I make extra principal payments during the IO period?
Many interest-only loans let you prepay principal, which reduces the interest charged after that point and lowers the recast payment. However, some IO loans carry prepayment penalties or limit extra principal, so check your note. Making voluntary principal payments during the IO period is one of the best ways to use the low opening payment without giving up the equity-building benefit.
Disclaimer
This interest-only loan calculator is provided for informational purposes only and does not constitute financial, lending, or tax advice. Estimates use the standard interest-only and amortization formulas and the inputs you enter; actual offers, rates, recast terms, and balloon requirements vary by lender, credit profile, loan program, and market. Always confirm your final payment, recast schedule, and balloon obligations directly with a licensed mortgage or lending professional before committing to an interest-only loan.