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Monthly Interest-Only Payment
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⚠️ Disclaimer: This calculator provides estimates for educational purposes only. Actual loan terms, rates, and payments may vary by lender. Consult a licensed mortgage professional before making loan decisions.
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Sources & Methodology
Formulas verified against Bankrate and CFPB interest-only mortgage guidelines.
Bankrate — Interest-Only Mortgage Calculator
bankrate.com — IO payment formula: (Interest Rate x Loan Amount) / 12.
Consumer Financial Protection Bureau (CFPB)
consumerfinance.gov — CFPB definition and risk disclosures for interest-only loans.
IO Payment: Monthly IO = Loan Amount × (Annual Rate / 12)
Post-IO Payment: Standard amortization formula using remaining principal, remaining term (months), and monthly rate. M = P × [r(1+r)^n] / [(1+r)^n - 1]
Post-IO Payment: Standard amortization formula using remaining principal, remaining term (months), and monthly rate. M = P × [r(1+r)^n] / [(1+r)^n - 1]
Last reviewed: April 2026
How Interest-Only Loans Work
An interest-only (IO) loan allows you to pay only the interest portion of your loan for a set period — typically 5 to 10 years. During this time, your principal balance stays the same. Once the IO period ends, your loan converts to a fully amortizing structure, and your monthly payment increases significantly to pay off the entire principal over the remaining term.
Interest-Only Payment Formula
IO Monthly Payment = Loan Amount × (Annual Rate / 12)
Example: $400,000 loan at 6.5% annual rate.
IO Payment = $400,000 × (0.065 / 12) = $400,000 × 0.005417 = $2,166.67/month
After 5-year IO period (25-year remaining): Standard payment = $2,731.41/month
IO Payment = $400,000 × (0.065 / 12) = $400,000 × 0.005417 = $2,166.67/month
After 5-year IO period (25-year remaining): Standard payment = $2,731.41/month
IO vs. Standard Payment Comparison
| Loan Amount | Rate | IO Payment | Standard 30yr Payment | Monthly Savings (IO) |
|---|---|---|---|---|
| $200,000 | 6.0% | $1,000 | $1,199 | $199 |
| $400,000 | 6.5% | $2,167 | $2,528 | $361 |
| $600,000 | 7.0% | $3,500 | $3,992 | $492 |
| $1,000,000 | 7.5% | $6,250 | $6,992 | $742 |
When Does an Interest-Only Loan Make Sense?
Interest-only mortgages are best suited for real estate investors who plan to sell before the IO period ends, high-income earners who prefer flexible cash flow, and borrowers with irregular income who want lower baseline payments. They are also common in jumbo mortgage markets and for commercial real estate.
Payment Shock: What Happens After the IO Period
The biggest risk of an IO loan is payment shock — the sharp increase in monthly payment when the IO period ends. On a $500,000 loan at 6.5% with a 5-year IO period, the IO payment is $2,708/month. After the IO period ends with 25 years remaining, the payment jumps to approximately $3,414/month — a 26% increase. Borrowers must plan for this increase.
💡 Pro Tip: Even during an interest-only period, you can make voluntary principal payments to reduce your balance. This will lower your payment when the loan converts and reduce total interest paid over the life of the loan.
Frequently Asked Questions
Multiply your loan balance by the annual interest rate, then divide by 12. For a $250,000 loan at 6%: $250,000 × 0.06 / 12 = $1,250 per month. No principal is included in this payment.
Your loan converts to a fully amortizing payment that includes both principal and interest. This payment is significantly higher because you must now pay off the entire original principal over the remaining loan term, which is shorter than the full term.
Yes. Interest-only mortgages are available through non-QM lenders, portfolio lenders, and some jumbo mortgage programs. They are not available as conventional conforming loans backed by Fannie Mae or Freddie Mac.
Not through payments. You only build equity during the IO period if the property value increases. Your loan balance stays the same. This is the primary risk of interest-only financing compared to standard amortizing loans.
Yes, most IO loans allow voluntary principal payments. This reduces your outstanding balance, which will lower your payment when the loan converts and reduce total interest paid. There is typically no prepayment penalty for additional principal payments.
It can be, especially for fix-and-flip investors or those who plan to sell within the IO period. Lower payments improve cash flow during the hold period. However, investors must be confident the property will appreciate enough to cover costs and generate profit at sale.
Most IO lenders require a credit score of 700-740 minimum, with the best rates available for scores above 760. Requirements are stricter than for conventional mortgages due to the higher risk profile of IO loans.
On a $300,000 loan at 6.5%, the IO payment is $1,625/month vs. $1,896/month for a standard 30-year payment — a savings of $271/month or $16,260 over a 5-year IO period. However, you build no equity during that time.
An interest-only ARM combines a variable (adjustable) rate with an IO payment period. The rate may change periodically based on a market index, which means your IO payment could increase or decrease. These carry higher risk than fixed-rate IO loans.
Plan ahead by saving the difference between your IO payment and what a standard payment would be. Consider making voluntary principal payments during the IO period. Some borrowers refinance into a new loan before the IO period ends to reset the amortization schedule.
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