What is an interest-only loan?
An interest-only loan is a loan where you pay only the interest charges for a set period — typically 5 to 10 years — without reducing the principal balance. After the interest-only period ends, your payments increase to cover both principal and interest over the remaining loan term. See also our Home Equity Loan Calculator.
How does an interest-only loan calculator work?
The calculator multiplies your annual interest rate by the loan principal, then divides by 12 to get your monthly interest-only payment. For example, a $300,000 loan at 6.5% yields a monthly payment of (0.065 × $300,000) / 12 = $1,625. It also shows daily, weekly, and annual interest costs.
What happens after the interest-only period ends?
Once the interest-only period ends, your monthly payment increases significantly because you now have to repay the full principal over the remaining loan term. The calculator shows you the estimated fully amortizing payment so you can plan ahead for this transition.
Does making interest-only payments reduce my loan balance?
No. Interest-only payments cover the cost of borrowing but do not reduce the principal. Your loan balance stays the same throughout the interest-only period, which means you owe the same amount when principal repayment begins. You might also find our Months to Pay Off — Loan Payoff useful.
What are the pros and cons of interest-only loans?
The main advantage is a lower initial monthly payment, which can free up cash flow for other investments or expenses. The downsides are that you build no equity during the interest-only period, and your payment will increase substantially once it ends — which can be a financial shock if you're not prepared.
Who typically benefits from an interest-only loan?
Interest-only loans can work well for borrowers who expect their income to grow significantly over time, real estate investors who plan to sell before the amortizing period begins, or buyers in high-cost markets who need lower initial payments to qualify.
Can I make principal payments during the interest-only period?
Most interest-only loans allow voluntary principal payments during the interest-only period. Making extra principal payments reduces your balance, which lowers the interest you owe and reduces your future amortizing payment. Check your loan agreement for any prepayment restrictions.
How is my payment calculated after the interest-only period?
After the interest-only period, your remaining loan term is used to fully amortize the original principal. The standard amortization formula calculates a fixed monthly payment covering both principal and interest, spread equally across the remaining months.