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.
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.
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.