How the interest-only payment is calculated
Payment after = balance × r ÷ (1 − (1 + r)−m)
During the interest-only period every payment is pure interest, so the balance does not fall. Afterwards the loan amortizes like a normal mortgage, but over only m months: the total term minus the interest-only months, with r equal to the annual rate ÷ 12. The shorter repayment window is why the payment rises even when the rate stays the same. If the loan is an adjustable-rate mortgage, a higher rate at the reset raises it further; enter the rate you want to test.
Worked example
A $400,000 loan at 6.5% for 30 years with a 10-year interest-only period costs $2,166.67 a month for the first 120 months. Then $400,000 must be repaid over the remaining 20 years, and the payment becomes $2,982.29, a jump of $815.63 a month. A standard 30-year loan at the same rate costs $2,528.27 from day one and has already paid the balance down to $339,105 by year 10. Over the life of the loan, the interest-only version costs $65,572 more interest.
How this calculator works, in plain language
For the first part of the loan you only pay the interest the lender charges each month, so you owe exactly the same amount at the end of that period as on day one. When it ends, the whole loan still has to be paid off, but now in fewer years, so the calculator works out a normal mortgage payment for the full balance over the years that are left. It then compares the total interest with a standard loan of the same size, rate and term that starts paying down the balance from the first month. The rate is held the same throughout; if your loan is adjustable, run it again with a higher rate to see the reset under a different rate.
Interest-only payments by scenario
Six loans run through the same formulas as the calculator, all with 30-year total terms. Rates are examples, not quotes.
| Loan | Interest-only payment | Payment after reset | Jump at reset | Standard payment | Extra interest vs standard |
|---|---|---|---|---|---|
| $300,000 at 6.5%, 10 years interest-only | $1,625.00 | $2,236.72 | +$611.72 (38%) | $1,896.20 | $49,179 |
| $400,000 at 6.5%, 5 years interest-only | $2,166.67 | $2,700.83 | +$534.16 (25%) | $2,528.27 | $30,071 |
| $400,000 at 6.5%, 7 years interest-only | $2,166.67 | $2,796.26 | +$629.59 (29%) | $2,528.27 | $43,589 |
| $400,000 at 6.5%, 10 years interest-only | $2,166.67 | $2,982.29 | +$815.63 (38%) | $2,528.27 | $65,572 |
| $400,000 at 7.25%, 10 years interest-only | $2,416.67 | $3,161.50 | +$744.84 (31%) | $2,728.71 | $66,427 |
| $750,000 at 7.0%, 10 years interest-only | $4,375.00 | $5,814.74 | +$1,439.74 (33%) | $4,989.77 | $124,221 |
The longer the interest-only period, the bigger the jump and the extra interest. On a $750,000 loan at 7% the reset adds $1,439.74 a month and the loan costs $124,221 more interest than a standard 30-year loan.
Common interest-only mortgage mistakes
- Budgeting on the interest-only payment. The reset payment is the one that has to fit your budget long-term; in every row above it is higher than a standard loan's payment.
- Assuming payments build equity. During the interest-only years they don't. Only extra principal or a rise in the home's value does.
- Testing only today's rate on an adjustable loan. Many interest-only loans are ARMs, so the rate can also change at the reset. Try a higher rate, or use the ARM calculator to apply the caps.
- Counting on a refinance before the reset. Refinancing depends on rates, your income and the home's value at that time; if any of them move the wrong way it may not be available.
- Comparing the interest-only payment with a standard payment and calling the difference savings. The lower payment is mostly principal you haven't repaid yet, and you pay more total interest for the privilege.
Interest-only loans and the rules
The Consumer Financial Protection Bureau lists an interest-only period among the "risky loan features" a Qualified Mortgage cannot have (last reviewed January 2, 2025), under the ability-to-repay rule in Regulation Z §1026.43 (current in 2026). Interest-only loans are offered as non-QM loans, typically with larger down payments, higher credit scores and more cash reserves. Lenders must still check that you can afford the higher payment after the reset, not only the interest-only payment.
When an interest-only loan can make sense, and the risks
- Uneven income. Borrowers paid largely in bonuses or commissions sometimes pay the interest monthly and make large principal payments when income arrives.
- The payment shock. The jump at the reset is certain, and it is larger with a longer interest-only period. Plan for it from the start.
- No equity from payments. Only price changes and extra principal build equity. If prices fall, you can owe more than the home is worth, which makes refinancing or selling harder.
If the lower payment is the goal, compare a longer standard term, a larger down payment or buying down the rate. This is an estimate for planning, not financial advice; your loan documents are final.
