Why would someone choose an interest-only loan?

It offers a lower initial payment, which can help with cash flow, but the balance never shrinks during that period, and payments typically increase substantially once regular amortization begins.

What happens after the interest-only period ends?

The payment resets to a fully amortizing amount that pays off the entire remaining principal over the rest of the loan term — this is usually a significant payment increase.

Interest-Only Mortgage Calculator

Calculate the monthly payment for an interest-only loan period, where you pay only the interest and none of the principal.

Loan principal

Annual interest rate

Monthly Interest-Only Payment

$1,250.00

How It Works

The interest-only formula

Monthly payment = (principal × annual interest rate) ÷ 12 — since none of the payment reduces the balance, this payment stays the same every month during the interest-only period.

Example Calculation

A $300,000 loan at 6% interest-only costs $1,500/month — none of which reduces the $300,000 balance.

Common Mistakes

Forgetting that the loan balance never decreases during the interest-only period — the full principal is still owed once that period ends.
Not planning for the payment increase when the loan converts to a regular amortizing payment after the interest-only period expires.

Frequently Asked Questions

Why would someone choose an interest-only loan?: It offers a lower initial payment, which can help with cash flow, but the balance never shrinks during that period, and payments typically increase substantially once regular amortization begins.
What happens after the interest-only period ends?: The payment resets to a fully amortizing amount that pays off the entire remaining principal over the rest of the loan term — this is usually a significant payment increase.