Interest-Only Mortgage Calculator

How to Calculate Interest-Only Mortgage Payments With This Calculator

Understanding what you'll pay with an interest-only mortgage is straightforward when you use a mortgage calculator. You'll need to enter four key pieces of information to see your estimated payments during and after the interest-only period:

• Loan amount: Enter the total amount you plan to borrow. This is your home's purchase price minus your down payment.
• Loan term: Select the total length of your mortgage in years. You can choose 10, 15, 20, 25 or 30 years.
• Interest rate: Enter the annual interest rate your lender quotes you. If you don't have an official preapproval letter, you can give an estimate based on current mortgage rates.
• Initial interest-only period: Choose how many years you want to make interest-only payments.

Once you enter these four pieces of information, the calculator will show you several important figures, including your monthly payment during the interest-only period, your monthly payment after the interest-only period ends, your total payments over the life of the loan and the total interest you'll pay.

These outputs help you compare the true cost of an interest-only mortgage against a traditional mortgage and determine whether this type of loan fits your budget and financial goals.

What to Consider Before Getting an Interest-Only Mortgage

An interest-only mortgage is a home loan that allows you to pay only the interest charges for a set period without paying down the principal balance. During this initial phase, your monthly payments are significantly lower than they would be with a traditional mortgage.

However, once the interest-only period ends, you'll need to start making payments toward both the principal and interest, which means your monthly payment will increase substantially.

Interest-only mortgages aren't backed by government programs like Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans; they also typically require borrowers to meet stricter qualification criteria. Lenders often look for applicants with substantial savings, high credit scores and low debt-to-income ratios.

This type of mortgage can make sense for specific situations:

• Short-term homeowners: If you plan to sell or refinance before the interest-only period ends, you can benefit from lower payments without facing the higher payments that come later.
• Real estate investors: Buyers purchasing properties as short-term investments may use interest-only mortgages to maximize cash flow while they own the property.
• Rental property owners: Landlords can use rental income to cover the lower interest-only payments while setting aside profits to pay off the principal when the loan term ends.
• High-income earners expecting windfalls: Borrowers anticipating bonuses, inheritances or other significant income boosts may opt for lower payments now with a plan to pay the principal later.

Pros and Cons of an Interest-Only Mortgage

Interest-only mortgages come with both advantages and disadvantages to consider before you apply. As you review the pros and cons, think carefully about how they might apply to your situation.

Factors That Affect Your Mortgage Payment

Your monthly mortgage payment is typically made up of four separate components, referred to as PITI (principal, interest, taxes and insurance). Understanding each factor can help you anticipate how your payment might change over time.

• Principal: The principal is the current loan amount. Over time, a portion of your monthly payment reduces this balance and builds equity. With an interest-only mortgage, though, you don't pay any principal during the initial period, so you're not building equity through your payments during that phase.
• Interest: Interest is what the lender charges you for borrowing money, calculated as a percentage of your principal balance. With a fixed-rate mortgage, your rate stays the same throughout the loan term, while an adjustable-rate mortgage (ARM)—the most common structure for interest-only loans—starts at one rate but can change periodically based on market conditions, causing your monthly payment to increase or decrease.
• Property taxes: Local and state governments levy property taxes to fund schools, infrastructure and public services, with your annual bill based on your home's assessed value.
• Homeowners insurance: Lenders require you to carry homeowners insurance to protect the property that serves as collateral for your loan. Premiums depend on your home's location, value, age and your area's risk for natural disasters. Like property taxes, homeowners insurance is typically collected monthly through an escrow account.

In some cases, lenders may also allow you to pay your homeowners association (HOA) dues through your escrow account.

The Bottom Line

An interest-only mortgage can provide short-term affordability and flexibility, but it's essential to have a clear repayment strategy before the interest-only period ends.

Before committing to any mortgage, check your Experian credit report and FICO^® Score^Θ for free. These resources can help you gauge your approval odds and give you insights into steps you can take to improve your credit and maintain a good credit score over time.