# Is an interest-only mortgage worth it?

Computes the interest-only payment, the higher payment after the interest-only period, and the extra interest compared with a regular fixed-rate mortgage of the same amount and term.

- Page: https://www.acalculator.org/finance/interest-only-mortgage-calculator
- JSON spec: https://www.acalculator.org/finance/interest-only-mortgage-calculator.json
- Version: 53c84c7d60d0

## Default answer

Example with the default inputs (Loan amount $400,000.00, Interest rate 6.5%, Loan term (years) 30, Interest-only period (years) 10, Loan start date September 30, 2026) on the example date Wednesday, September 30, 2026: A $400,000.00 interest-only mortgage at 6.5% costs $2,166.67 a month for 10 years, then $2,982.29 a month.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| amount | Loan amount | The amount borrowed. |
| rate | Interest rate | The fixed yearly rate. The monthly rate is this ÷ 12. |
| years | Loan term (years) | The whole length of the mortgage, interest-only years included. |
| io | Interest-only period (years) | How many years at the start you pay only the interest. |
| start | Loan start date | The day the loan starts. The first payment is one month later. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| ioPayment | Interest-only payment | The monthly payment in the interest-only years: the loan × the rate ÷ 12. |
| laterPayment | Payment after the interest-only period | The level payment that repays the whole loan over the years left. |
| jump | Payment rise | How much the monthly payment goes up when the interest-only period ends. |
| interest | Total interest | All the interest over the whole term. |
| regularPayment | Regular loan payment | The payment on a regular loan of the same amount, rate, and term. |
| regularInterest | Regular loan interest | All the interest on that regular loan. |
| extraInterest | Extra interest from interest-only | Total interest minus the regular loan’s interest. |
| total | Total paid | The loan amount plus all the interest. |
| firstFull | First higher payment | The month of the first payment after the interest-only period, when a start date is given. |

## Method

interest-only payment = L × r; later payment = L × r ÷ (1 − (1 + r)^−(n − m)), with L the loan, r the rate ÷ 12, n the months, and m the interest-only months.

## Assumptions

- The rate is fixed for the whole term, and interest is charged monthly at the yearly rate ÷ 12.
- In the interest-only years the balance does not fall; afterwards the whole loan is repaid over the months left.
- The first payment is one month after the start date; nothing is rounded between months.
- Property tax, insurance, and fees are not included.

## Worked examples

1. amount = $400,000.00, rate = 6.5%, years = 30, io = 10 gives ioPayment = $2,166.67, laterPayment = $2,982.29, interest = $575,750.21, regularPayment = $2,528.27, extraInterest = $65,572.26. Source: CFPB, What is an interest-only loan? (the payment rises when the interest-only period ends).
2. amount = $250,000.00, rate = 7%, years = 30, io = 5, start = 2026-10-01 gives ioPayment = $1,458.33, laterPayment = $1,766.95, firstFull = 2031-11-01.
3. amount = $300,000.00, rate = 0%, years = 30, io = 10 gives ioPayment = $0.00, laterPayment = $1,250.00, interest = $0.00, extraInterest = $0.00.

## FAQ

### How is an interest-only payment calculated?

It is the loan balance times the yearly rate ÷ 12. On $400,000 at 6.5%, that is 400,000 × 0.065 ÷ 12 = $2,166.67 a month. None of it lowers the balance, so you still owe $400,000 when the interest-only years end.

### What happens when the interest-only period ends?

The whole loan must then be repaid over the years left, so the payment rises even if the rate stays the same. On $400,000 at 6.5% over 30 years with 10 interest-only years, the payment goes from $2,166.67 to $2,982.29 for the last 20 years. The Consumer Financial Protection Bureau warns that the rise can be large.

### Does an interest-only mortgage cost more?

Usually yes, because the balance stays high for longer and interest is charged on it. In the example above you pay $575,750 of interest, $65,572 more than on a regular 30-year loan at the same rate.

### Who uses an interest-only mortgage?

Borrowers who expect their income to rise, who plan to sell or refinance before the payment goes up, or who want a low payment for a few years. Do not count on being able to sell or refinance: home values and your finances can change.

### Can I pay extra principal during the interest-only years?

Most interest-only loans allow it, and it lowers both the interest and the later payment. This page assumes you pay only the interest in those years. Check your loan for a prepayment penalty.

### Are interest-only loans qualified mortgages?

No. Under the federal ability-to-repay rule, a qualified mortgage cannot have interest-only payments, so these loans are non-qualified mortgages with their own lender rules.

## Sources

- Consumer Financial Protection Bureau, What is an "interest-only" loan? (the payment rises when the interest-only period ends). https://www.consumerfinance.gov/ask-cfpb/what-is-an-interest-only-loan-en-101/
- Consumer Financial Protection Bureau, What is a Qualified Mortgage? (no interest-only payments). https://www.consumerfinance.gov/ask-cfpb/what-is-a-qualified-mortgage-en-1789/
- Amortized loan payment (annuity) formula: S. A. Broverman, Mathematics of Investment and Credit, chapter 3.