An interest-only mortgage gives you a low monthly bill for the first few years because your payment covers only the interest charges — none of the principal. That smaller check frees up cash in the short term, but it hides a large reset waiting at the end of the interest-only period, when the same original balance must suddenly be paid down over a shorter number of years. This calculator shows both sides of that tradeoff side by side: what you pay now, what you will pay after the reset, and how much interest the whole arrangement costs.
Enter your loan amount, the rate, how many years stay interest-only, and the number of years left to amortize the balance afterward. Every figure updates instantly, so you can see how a longer interest-only window lowers today's payment but raises tomorrow's reset.
How to Use
- Type the Loan Amount — the principal you are borrowing. If you are comparing a home price, subtract your down payment first so the figure matches what the lender actually funds.
- Set the Interest Rate (APR). Interest-only loans often carry a higher rate than fully amortizing mortgages because the lender receives no principal during the IO phase, so shop the rate specific to this product rather than a standard 30-year quote.
- Choose the Interest-Only Period — typically 5, 7, 10, or 15 years. During this window your payment is pure interest and the balance does not shrink at all.
- Choose the Repayment (Amortization) Years — the years left to pay the full principal after the IO period ends. On a typical 30-year loan with a 10-year IO period, this is 20 years.
- Read the result card from top to bottom: the low Interest-Only Payment, the higher Payment After IO Period, the Payment Increase at Reset, and the lifetime interest totals.
The two payment lines are the whole point. The gap between them — the payment jump — is what catches borrowers off guard when the interest-only period expires. Budget for the reset payment from day one, not when the bill arrives.
The Math Behind the Two Payments
During the interest-only phase the monthly payment is trivial: it is simply the outstanding principal multiplied by the monthly rate.
Interest-only payment = P × r
Where P is the loan amount and r is the annual APR divided by 12. No principal is paid, so the balance stays flat for the entire IO period.
When that period ends, the lender re-amortizes the unchanged principal over the remaining years using the standard formula used by Fannie Mae and every major US bank:
Post-IO payment = P × r(1 + r)ⁿ / ((1 + r)ⁿ − 1)
Where n is the total number of monthly payments in the repayment phase — the amortization years times 12.
Worked example on a $400,000 loan at 6.5% with a 10-year IO period followed by 20 years of amortization: during the IO phase the monthly rate is 0.005417, so the interest-only payment is $2,166.67 and the balance never moves. After 10 years the same $400,000 is amortized over 240 months, and the payment jumps to about $2,982.29. That is a roughly $816 monthly increase the moment the interest-only window closes — even though nothing about the loan itself changed. If the rate is 0%, the engine simply splits the principal evenly across the repayment months so the formula never divides by zero.
Why the Reset Is So Steep
The reason the post-IO payment feels painful is that you are compressing 10 years of principal paydown you skipped into the remaining schedule. A normal 30-year loan on the same $400,000 at 6.5% would charge about $2,528 per month from day one and steadily retire the balance. The interest-only version charges $2,167 for ten years — saving about $360 a month — but then demands $2,983 for the next twenty years. Over the full 30 years you pay far more interest, because the principal sat at its maximum for a decade instead of declining.
Interest-only loans make the most sense when your near-term income is unusually low but expected to rise sharply, you plan to sell or refinance before the reset, or you need the freed cash for a higher-return use. They are a poor fit if you would be unable to cover the post-IO payment and are counting on appreciation alone.
Examples
Example 1 — The classic 10-year IO reset. A buyer takes $400,000 at 6.5% with a 10-year interest-only period and a 20-year repayment tail. For the first 120 months the bill is $2,166.67, all interest. At year ten the loan re-amortizes and the payment becomes $2,982.29 — an increase of about $816 per month — and stays there for 20 years. Total interest paid over the life is roughly $575,750, far above a standard 30-year loan.
Example 2 — A jumbo loan stress test. On a $1,000,000 loan at 7.0% with a 5-year IO period and 25-year amortization, the interest-only payment is $5,833.33 per month. After the five-year window the reset is about $7,067.79. Running this number before signing tells you whether you could actually carry the higher payment if you cannot sell or refinance in time.
Example 3 — A short IO window. On a $200,000 loan at 6.0% with a 5-year IO period and 25-year repayment, the low IO payment is $1,000; the reset climbs to about $1,289. The smaller IO period shrinks the gap, which is why 5- and 7-year IO loans are viewed as safer than 10- or 15-year ones.
FAQ
How is an interest-only mortgage payment calculated?
During the interest-only phase the monthly payment equals the loan amount times the monthly interest rate (APR divided by 12). No principal is paid, so the balance does not decline. At the end of the IO period the unchanged principal is re-amortized over the remaining years with the standard formula P × r(1+r)ⁿ / ((1+r)ⁿ − 1).
What happens when the interest-only period ends?
Your payment rises to cover both principal and interest over the remaining amortization years. Because you paid nothing toward principal during the IO phase, the reset payment is almost always substantially higher than your old bill. Some loans convert to this amortizing schedule automatically; others require refinancing or a balloon payment.
Is an interest-only mortgage a good idea?
It can be if your income will rise, you plan to sell or refinance before the reset, or you need the freed cash for a higher-return use. It is risky if you would not be able to afford the post-IO payment and are betting that home appreciation will bail you out. Always budget for the reset payment, not the teaser rate.
How much lower is the interest-only payment?
It depends on the rate, but on a $400,000 loan at 6.5% the IO payment is about $2,167 versus roughly $2,983 after a 10-year reset — a difference of around $816 per month. The longer the IO period and the shorter the repayment tail, the larger that jump becomes.
Do I build equity during the interest-only period?
Not from paying down principal. Your balance stays flat, so equity growth comes entirely from home price appreciation (and any extra payments you choose to make). If prices fall during the IO window, you can end up owing more than the home is worth.
Can I pay extra principal during the IO period?
Most interest-only loans allow you to make voluntary principal prepayments, which reduces the balance and therefore the eventual reset. Check whether your loan has a prepayment penalty, and confirm that any extra payment is applied to principal rather than counted toward the next interest-only installment.
Disclaimer
This interest-only mortgage calculator is provided for informational purposes only and does not constitute financial, lending, or tax advice. Estimates are based on the inputs you enter and the standard formulas described above; actual offers, rates, reset terms, and balloon provisions vary widely by lender, credit profile, and loan program. Always confirm your payment schedule and reset terms directly with a licensed mortgage professional before committing to an interest-only loan.