What this calculator does
See what you'll pay during an interest-only period, and how much your payment grows when it ends. An interest-only loan lets you pay just the interest for a set number of years. The balance stays where it started, so the early payments are lower than on a regular loan. But when the interest-only period ends, you still owe the whole amount you borrowed (the principal). You have to repay it over the years that are left, so the payment jumps.
This calculator shows both payments side by side and the size of the jump. It also shows the total interest over the life of the loan. Then it prices the same loan as a regular one that pays down the principal from the first month. That way you can see what the lower early payments cost in extra interest.
Where it's used
Why this math matters outside the classroom:
- Comparing loan offers. A buyer sees that $300,000 at 6% costs $1,500 a month interest-only, then compares that with the payment once repayment starts.
- Investment property. An investor planning to sell in 7 years checks the interest-only payment against rent and the payment if the property doesn't sell.
- Budget stress test. A household checks whether it could still afford the loan if the payment rose by more than a third after year 10.
- Series in algebra. Students derive the amortizing payment from the sum of a geometric series and apply it to the months left after an interest-only period.
- Cost of waiting. Advisers show that keeping a $400,000 balance untouched for 10 years at 6.5% adds about $65,572 of interest over a regular loan.
Grade level and standards: Grades 11–12; Common Core State Standards for Mathematics HSA.SSE.B.4. © Copyright 2010. National Governors Association Center for Best Practices and Council of Chief State School Officers. All rights reserved.
How to use it
- Enter the loan amount and the yearly interest rate.
- Enter how many years the interest-only period lasts.
- Enter the total term of the loan, including the interest-only years.
- Read the interest-only payment, the later payment and the comparison with a regular loan. The table shows the balance year by year.
What the inputs mean
- Interest rate
- This calculator treats the rate as fixed for the whole term. Many interest-only loans have adjustable rates. For those, the later payment depends on the rate at the time it resets.
- Interest-only period
- Common interest-only periods are 5, 7 or 10 years. Partial years are rounded to whole months.
- Total loan term
- The full life of the loan. A 30-year loan with a 10-year interest-only period leaves 20 years to repay the principal.
Formula and method
i = yearly rate ÷ 100 ÷ 12 interest-only payment = P × i later payment = P × i ÷ (1 − (1 + i)^(−m)), where m = months left after the interest-only period total interest = interest-only payment × interest-only months + (later payment × m − P) extra interest = total interest − total interest on a regular loan over the full term
In these formulas, P is the principal (the amount you borrow) and i is the monthly interest rate as a decimal. m is the number of months left to repay once the interest-only period ends.
During the interest-only period, each payment covers exactly one month's interest on the full balance. So nothing is repaid, and the balance never falls.
Afterward, the loan becomes an ordinary loan with the same payment every month, paying down the full principal over fewer months. Squeezing the same principal into a shorter time is what makes the later payment so large. It's larger than a regular loan's payment, not only larger than the interest-only payment.
Because the balance stays high for longer, more interest builds up in total than on a regular loan with the same rate and term.
Worked example
You borrow $400,000 at 6.5% for 30 years, with the first 10 years interest-only.
- Monthly rate: 6.5 ÷ 1,200 = 0.00541667.
- Interest-only payment: $400,000 × 0.00541667 = $2,166.67 a month for 120 months.
- Later payment: $400,000 repaid over the remaining 240 months is $2,982.29 a month, an increase of $815.63.
- Total interest: $260,000.00 during the interest-only years ($400,000 × 0.065 × 10) + $315,750.21 during repayment = $575,750.21.
- A regular 30-year loan would cost $2,528.27 a month and $510,177.95 in interest. So the interest-only period adds $65,572.26.
Result: You pay $2,166.67 a month for 10 years, then $2,982.29 a month for 20 years, with $575,750.21 of interest in total.
Understanding the result
The later payment is the number to plan around. Say your budget can only handle the interest-only payment. Then the loan becomes hard to afford when the period ends, unless your income has risen or you plan to sell or refinance by then.
The extra interest is the price of the lower early payments. It's larger with a longer interest-only period and a higher rate.
If you make extra principal payments during the interest-only period, the balance falls. Then the later payment is smaller than shown here.
Assumptions and limitations
- A fixed rate for the whole term, with interest charged monthly and payments at the end of each month.
- No extra principal payments during the interest-only period.
- After the interest-only period, the loan is fully paid off over the remaining months, with the same payment each month.
- Adjustable rates, rate caps and resets are not modeled. Use the adjustable-rate mortgage calculator for those.
- Taxes, insurance, fees and mortgage insurance are not included in the payments.
- Loans that end with a balloon payment (one large final payment) instead of being paid down are not covered here.
- Results are estimates, not a lender's quote.
Frequently asked questions
Why is the later payment higher than a normal loan payment?
A regular 30-year loan repays the principal over 360 months. After 10 interest-only years, the same principal must be repaid in 240 months. So each payment has to carry more principal. That's why the later payment here is $2,982.29 instead of $2,528.27.
Do interest-only payments build any equity?
Not through the loan. Equity is the part of the property you own outright. The balance is the same at the end of the interest-only period as at the start. Any equity comes from a rise in the property's value or from extra payments you choose to make.
When does an interest-only loan make sense?
Some borrowers who expect much higher income later use them. So do investors who plan to sell before repayment starts, and people who need short-term financing. The risk is that you can't afford the later payment or refinance if rates or property values move the wrong way.
Can I pay principal during the interest-only period?
Many loans allow it. Extra principal lowers the balance. That cuts the later payment, and on many loans the interest-only payment too. Check your loan terms for how and when payments are recalculated.
How this calculator is checked
Method: Interest-only payment P × i, followed by the standard level-payment annuity formula over the remaining months; comparison with a fully amortizing loan. The calculation is covered by automated tests with known reference values and edge cases. Last updated 2026-10-18. Found a problem? Tell us.
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