Interest Only Calculator
Calculate monthly interest-only payment on any loan. Compare against amortizing principal+interest payment to see the cash-flow vs total-cost tradeoff. Formula: Loan × Annual rate / 12.
Reviewed & updated for 2026 by Rakesh Choudhary, PhD · How we calculate
When interest-only makes sense
- HELOC draw period: Standard 10-year IO followed by 20-year repayment. Pay only on what you've drawn.
- Real estate investors: Maximize cash flow during property appreciation, sell or refinance before IO period ends.
- Bridge loans: Cash flow during property transition (buying new home before selling old).
- Construction loans: Pay interest only while construction is underway, then convert to amortizing.
- High-income, low-cash-flow situations: Defer principal during low-income years (residents, partners on partnership track).
When IO is a bad idea: standard homebuyer who plans to keep the home long-term and wants to build equity through amortization.
Interest-only payment reference
| Loan amount | 5% APR | 7% APR | 9% APR |
|---|---|---|---|
| $50,000 | $208 | $292 | $375 |
| $100,000 | $417 | $583 | $750 |
| $200,000 | $833 | $1,167 | $1,500 |
| $300,000 | $1,250 | $1,750 | $2,250 |
| $500,000 | $2,083 | $2,917 | $3,750 |
| $1,000,000 | $4,167 | $5,833 | $7,500 |
Monthly interest-only payment. Principal balance does NOT decrease during IO period.
The payment shock at the end of the IO period
Interest-only loans look great in years 1-10. Then the IO period ends and most borrowers experience what lenders call payment shock — a sudden, sharp increase in the monthly payment. The size of the shock depends on what the loan does next:
| Loan type | IO payment | Post-IO payment | Increase |
|---|---|---|---|
| $300K HELOC, 10-yr IO → 20-yr amort | $1,750 | $2,326 | +33% |
| $300K mortgage, 5-yr IO → 25-yr amort | $1,750 | $2,121 | +21% |
| $300K mortgage, 7-yr IO → 23-yr amort | $1,750 | $2,233 | +28% |
| $300K balloon, 5-yr IO | $1,750 | $300,000 due | Refinance or default |
Borrowers who took IO loans in 2005-2007 and were caught by the 2008 housing crash often couldn't refinance because home values had fallen, leaving them owing more than the home was worth. Many ended up in foreclosure not because their original payment was unaffordable, but because the post-IO payment jumped 30%+ at the exact moment refinancing options vanished. This is the central risk of IO loans for primary residences.
IO vs amortizing: total cost over 30 years
An interest-only loan looks cheaper monthly but is more expensive overall because you never reduce the principal. Compare a $300,000 loan at 7% APR over 30 years:
| Scenario | Total payments | Equity at year 10 | Equity at year 30 |
|---|---|---|---|
| Standard 30-yr P+I | $718,527 | $35,800 | $300,000 (paid off) |
| 10-yr IO → 20-yr amort | $768,288 | $0 | $300,000 (paid off) |
| 5-yr IO → 25-yr amort | $741,600 | $14,500 | $300,000 (paid off) |
An interest-only loan costs about $50,000 more over the life of the loan and leaves you with zero equity for the first 5-10 years. The trade-off is real but the math doesn't favor IO for ordinary homebuyers who plan to stay long-term.
FAQs
What is an interest-only loan?
A loan where you pay only the interest each period, no principal. The principal balance stays constant. After the interest-only period (typically 5-10 years), the loan converts to principal+interest amortization OR balloons due. Common types: HELOCs during draw period, some construction loans, ARM mortgages with interest-only option.
How is interest-only payment calculated?
Formula: Monthly interest-only payment = Loan balance × (Annual rate / 12). Example: $200,000 loan at 7% annual rate = $200,000 × (0.07/12) = $1,166.67/month interest-only. To pay down principal, you'd add an extra payment on top.
Is interest-only a good idea?
Rarely for primary mortgages, you build no equity. Common use cases: HELOC during draw period (only borrowing temporarily), real estate investors with cash flow strategy, bridge loans during property transition, construction loans (where principal payments start after completion). For typical homebuyers: traditional amortizing loan is better.
What happens after the interest-only period ends?
Two common scenarios: (1) Loan converts to principal+interest amortization, payment jumps because you must now amortize the principal over the remaining (often shorter) term. (2) Balloon payment, the entire principal is due at the end of the interest-only period. Always know which applies BEFORE taking the loan.
Are interest-only loans cheaper?
Lower monthly payment, but MORE expensive total. You pay the same interest forever on the full principal. Over 10 years of interest-only at 7% on $300K, you pay $210,000 in interest with no principal reduction. Same loan amortized would have you owe far less by year 10. Interest-only saves cash flow short-term but costs more long-term.
Can I pay down principal during the interest-only period?
Yes, most interest-only loans allow voluntary principal payments. This shifts you from purely interest-only to interest+some principal. Each principal payment reduces your future minimum interest-only payment (since the interest is calculated on the balance). Always ask about prepayment penalties first.