Interest Only Mortgage Calculator
Use our Interest Only Mortgage Calculator to determine your initial monthly payment, projected payments and downside case for an interest only loan. Your interest rate and mortgage payment can increase significantly with an interest only mortgage and you can use our calculator to evaluate how your payment and interest expense can change over the course of your loan. We recommend that you use this calculator to run different cases to understand if an interest only mortgage is the right financing choice for you.
How Our Interest Only Mortgage Calculator Works
Interest only mortgages have two phases: the interest only period and the adjustable period. The interest only period is when your interest rate and monthly payment are fixed and your payment is comprised of only interest and no principal, which means it is lower than the payment for an amortizing loan. At the end of the interest only period, the loan starts to amortize, which means you are required to pay both principal and interest so your monthly payment typically increases. During this phase of the loan your interest rate is also subject to adjust on an annual or semi-annual basis, depending on your loan terms. This is why interest only loans are also sometimes called interest only adjustable rate mortgages or interest only ARMs for short. Our Interest Only Mortgage Calculator captures all of these factors to help you evaluate your initial and potential future monthly payments.
Interest Only Period. This is the length of the interest only period of the loan during which your payment is comprised only of interest and no principal.
Interest Only Period Rate. This is your mortgage rate during the interest only period. The shorter the interest only period, the lower your interest rate.
Adjustment Period. This is how frequently your loan can adjust after the interest only period ends. Interest only mortgages usually adjust every year or semi-annually.
Interest Only Index. This is an interest rate such as treasury yield that is one of two components that are used to calculate the fully-indexed rate, which is your interest rate after the interest only period, when the mortgage also amortizes. The interest only index is dynamic and changes based on economic conditions.
Interest Only Margin. This is a set percentage rate that is added to the interest only index to determine your fully-indexed rate. The interest only margin is fixed and does not change over the course of your loan.
Loan Caps. Interest only mortgages have adjustment and life caps that restrict how much your mortgage rate can change at each adjustment period and over the course of the loan but, as our Interest Only Mortgage Calculator demonstrates, your rate and payment can still spike. The interest only period rate plus the life cap equals the maximum mortgage rate for an interest only loan.
Our Interest Only Mortgage Calculator enables you to understand the following information:
Interest Only Payment. This is your monthly payment during the interest only phase of the loan and is calculated using the interest only period rate. You continue making this payment for a fixed number of years, depending on the length of the interest only period. The lower your initial rate, the lower your payment. This monthly payment is also lower because it does not include principal.
Payment After the Interest Only Period. Following the interest only period, your mortgage amortizes which means you are required to pay both principal and interest. During this phase of the loan your interest rate is also subject to adjust on an annual or semi-annual basis, depending on your mortgage terms. The rate during this phase of an interest only mortgage is called the fully-indexed rate and is calculated by adding the index to the margin. For example, if the index is 3.000% and the margin is 2.500%, then the fully-indexed rate used to calculate your payment is 5.500%. Our calculator shows you the current fully-indexed rate and monthly payment based on the information you inputted. The fully-indexed rate changes over time but this scenario allows you to evaluate what your payment may be when the mortgage begins to amortize. You can also understand the total interest expense for an interest only loan based on applying the current fully-indexed rate for the remainder of the mortgage.
Downside Case. The final scenario our Interest Only Mortgage Calculator shows you is the downside case, when your interest rate and monthly payment increase as much as possible as quickly as possible. In short, this is what could happen if your interest rate spikes when you are required to start paying principal. This scenario demonstrates the potential payment shock for borrowers accustomed to making a lower interest only payment. This case represents the significant downside of an interest only mortgage as compared to a fixed rate or adjustable rate mortgage. While this case is improbable the calculator enables you understand all of the possible scenarios -- good and bad -- for an interest only loan.
What Borrowers Should Know About an Interest Only Mortgage
Interest Only Mortgage Basics
With an an interest only mortgage you pay only interest and no principal during the first three, five, seven or ten years of the loan, which is called the interest only period, and then loan converts into an amortizing mortgage and you pay both principal and interest for the remainder of the mortgage, which is called the adjustable rate period because your interest rate is subject to change. Interest only mortgages are often referred to as 3/1, 5/1, 7/1 or 10/1 Interest Only ARMs (IO ARMs) with the first number indicating the length of the interest only period and the second number indicating how frequently the interest rate can change during the adjustable rate period. For example, with a 5/1 interest only mortgage, you pay only interest at a fixed interest rate for the first five years of the loan and then you pay both interest and principal plus your mortgage rate is subject to change and potentially increase on an annual basis for the remaining 25 years of the mortgage.
Interest Rate for an Interest Only Mortgage
The interest rate for an interest only mortgage during the interest only period is set by the lender based on market conditions and negotiations with the borrower. The interest only period interest rate is usually less than the rate for a 30 year fixed rate mortgage but higher than the rate for a comparable adjustable rate mortgage (ARM). The interest rate during the adjustable rate period is called the fully-index rate and is determined by adding the index to the margin. The margin is a set interest rate, usually between between 2.0% and 3.0%, that does not change over the course of your mortgage. The index is an underlying interest rate, such as SOFR, LIBOR or the treasury rate, that fluctuates based on economic factors. Because you add the index to the margin to determine your mortgage rate, if the index increases, your mortgage rate increases but if the index decreases, your rate goes down. If the fully-indexed rate increases, your mortgage payment increases as well. Additionally, when your mortgage converts from an interest only loan to an amortizing loan, your mortgage payment typically increases because you start paying both principal and interest plus your interest rate can increase which would cause your payment to increase even more. Our Interest Only Mortgage Calculator shows you how the monthly payment based on the fully-indexed rate and including principal increases as compared to the initial payment.
Benefits of an Interest Only Mortgage
Benefits of an interest only mortgage include a lower initial monthly mortgage payment as compared to a fixed rate mortgage or adjustable rate mortgage. The lower monthly mortgage payment typically means that you can afford a larger mortgage amount with an interest only loan. Use our Interest Only Mortgage Calculator to determine the lower monthly payment during the initial several years of the loan. Additionally, interest only loans offer borrowers the flexibility to pay down their mortgage balance when they want to. Borrowers can pay down their mortgage balance by any amount at any time over the course of the loan which is especially beneficial to borrowers who generate a significant portion of their income from a bonus. Interest only mortgages can also be a good option for borrowers in a high interest rate environment. In that scenario you pay a lower monthly payment initially and then you also benefit when your interest rate declines in the future. Predicting interest rates is highly challenging and exposes borrowers to significant risk.
Negatives of an Interest Only Mortgage
Negatives of an interest only mortgage include the possibility that your monthly payment and interest rate jump in the future. When your mortgage converts from an interest only loan to an amortizing loan, your mortgage payment typically increases because you start paying both principal and interest plus your interest rate can increase which would cause your payment to increase even more. With some interest only mortgages your mortgage rate can increase by 50% or more at any adjustment period which causes your monthly payment to increase significantly. In general, interest only mortgages are better suited for borrowers with a higher risk tolerance or who are going to sell their homes before the end of the interest only period. Our Interest Only Mortgage Calculator enables you to understand the negatives of an interest only loan by showing you the monthly payment and total interest expense using the maximum mortgage rate. Borrowers who value certainty and peace of mind should avoid the potential payment shock associated with an interest only mortgage.
You May Need to Shop Around to Find an Interest Only Mortgage
After the real estate market collapsed most lenders stopped offering interest only mortgages due to regulatory issues and other concerns. As the real estate and mortgage markets have recovered over the past several years more lenders have started offering interest only loans again but most lenders still do not offer them. You may need to contact multiple lenders to find one that offers interest only mortgages. Because they are less common, there tends to be a wider discrepancy in loan terms plus qualification requirements can vary. For example, one lender may charge a significantly higher interest rate and require a higher down payment than another lender. Borrowers should always shop multiple lenders to find the best mortgage terms but the relative market scarcity makes this especially important for interest only loans.
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More FREEandCLEAR Mortgage Resources
How an Interest Only Mortgage Works
Review our comprehensive explanation of how an interest only mortgage works including key program terminology, reasons to select an interest only mortgage and informative examples
Downsides of an Interest Only Mortgage
Understand the key risks of an interest only mortgage including potential payment shock when borrowers are required to start paying both principal and interest
Interest Only Mortgage Rates
Review interest only mortgage rates in your area based on interest only period rate, credit score and other inputs. Comparing interest only mortgage rates from multiple lenders is the best way to find the mortgage with the lowest rate and fees
Ask an Expert
Got mortgage questions? We love answering them. Submit your mortgage questions and receive an informative response within 24 hours
Pros and Cons of an Interest Only Loan
Understand the benefits and risks of an interest only mortgage to determine if it meets your financial and personal objectives
Sources
"What is an "interest-only" loan?” CFPB. Consumer Financial Protection Bureau, February 22 2017. Web.