Interest-Only Mortgage Calculator

An interest-only loan or mortgage is a type of loan that makes the borrower pay only interest for the provided period. In other words, you are not paying off your debt (principal value), just the interest.

As only interest is paid each month, your debt remains the same. After the specific period is over, you will have to pay back your debt either as a lump sum or monthly with different terms.

By opening the "Interest-only period" section of the calculator, you can also provide the length of the interest-only loan period and discover how much you will have to pay for the entire time with the provided conditions.

Here are the Advantages of an interest-only mortgage loan:

1. The monthly payments are smaller than a typical mortgage over the period without the principal.
2. The mortgage interest rates are often small. You can invest the money you saved from not paying the principal value. The savings calculator may help you estimate potential income.
3. Managing your household's budget is easier due to small and stable interest-only mortgage payment.
4. If you expect that your salary will increase with time, it will be easier for you to pay off the debt in the future.

There are, however, some disadvantages to an interest-only mortgage loan:

1. As the principal value is not paid, your mortgage remains the same — your debt does not decrease. Interest-only loans do not amortize during the interest-only period.
2. You will still have to repay the principal value of your mortgage. It means that you will need to pay a higher amount each month after the interest-only period (where you pay back the interest and principal together) or pay off the principal as a lump sum.
3. Having a high amount to pay in the future may be risky as you cannot be sure about your future situation. For example, becoming unemployed or being faced with unexpected additional costs may lead to financial troubles.

Imagine you are planning on buying a new house, and, for that reason, you need to borrow $350,000. According to the terms of your mortgage, it will be an interest-only loan during the first ten years, with an annual interest rate of 4%.

The next step is to calculate your payment for this period using the interest-only mortgage calculator. If you want to calculate the monthly payment, choose this option in the payment frequency field.

In this example, we are calculating monthly payments based on the yearly interest rate. It means that we have to divide 4% by 12 months.

Yearly payment = Loan amount × Annual Interest rate

Yearly payment = $350,000 × 0.04 = $14,000

Monthly payment = $350,000 × 0.04 / 12 = $14,000 / 12 = $1,166.67

Based on the example terms, you will have to pay $1,166.67 each month for the next ten years. After this period, you will still have a $350,000 debt that has to be paid off in a lump sum or with higher monthly payments.

If you'd like to compare it with a regular mortgage, check the mortgage calculator.