How the Interest-Only Mortgage Calculator works
An interest-only mortgage lets you pay only the interest due each month for a set number of years — the interest-only (IO) period. No principal gets paid down during that window, so the loan balance stays exactly where it started. Once the IO period ends, the loan reamortizes: the full original balance must be paid off over whatever term remains, which produces a noticeably higher monthly payment. This calculator walks through both phases using the standard amortization formula.
Phase one: the interest-only payment
During the interest-only period, the monthly payment is simply the balance times the monthly interest rate:
Payment = Loan amount × (Annual rate ÷ 12)
Because none of this payment reduces principal, the loan balance at the end of the IO period equals the loan balance at the start. Total interest paid across the IO period is just this monthly payment multiplied by the number of IO months.
Phase two: reamortization
Once the interest-only period ends, the lender spreads the full original balance over the remaining term (total term minus the IO years) using the standard amortizing-loan formula:
M = P × i × (1 + i)n ÷ ((1 + i)n − 1)
where P is the loan amount, i is the monthly interest rate (annual rate ÷ 12), and n is the number of remaining monthly payments. Because the same balance now has to be paid off in a shorter window and principal is included, this payment is always higher than the interest-only payment — often substantially so.
Worked example
Take a $400,000 loan at 6.5% with a 10-year interest-only period on a 30-year total term. The interest-only payment is $400,000 × (0.065 ÷ 12) ≈ $2,167/month, and total interest during those 10 years is about $260,000. After year 10, the same $400,000 balance reamortizes over the remaining 20 years, which pushes the monthly payment to roughly $2,983 — about $816 higher than the interest-only payment.
Why total interest runs higher
Because the balance never shrinks during the interest-only years, you keep paying interest on the full original loan amount for longer than you would on a standard amortizing loan, where principal starts declining from the first payment. The trade-off is lower payments (and more monthly cash flow flexibility) up front in exchange for a bigger payment jump later and more interest paid in total.
What this calculator does not include
This tool computes principal-and-interest mechanics only. Property taxes, homeowners insurance, private mortgage insurance, HOA dues, and closing costs are not included and should be budgeted separately.