How this instrument works
An interest-only mortgage charges a monthly payment equal to nothing but that month's interest on the original loan amount, for a set introductory period — commonly five or ten years. Because the balance the interest is calculated on never moves, the payment itself never moves either: it is the same figure in month one and in the last month of the interest-only window, which is unusual in mortgage math, where payments on an amortizing loan are fixed but the interest-versus-principal mix inside them shifts constantly.
Real-estate investors and house flippers who plan to sell or refinance before the interest-only period ends reach for this structure to keep the required monthly outlay as low as the loan legally allows, freeing cash for renovation costs or a next purchase. Borrowers with irregular or commission-heavy income use the same math to shrink the payment during lean months. Both groups are comparing this figure against what a fully amortizing loan on the same balance would cost every month, and the gap between the two numbers is the entire appeal of the product.
The formula says nothing about what happens after the interest-only window closes. Some loans demand the untouched balance in one lump sum; others recast automatically into a fully amortizing schedule over whatever years remain, at a payment well above the interest-only figure because it must now retire the whole original principal in a shorter span. This sheet reports the balance either outcome starts from — the debt exactly as it stood on day one — not which outcome your loan documents specify or what refinancing will look like when the date arrives.
- Enter the amount borrowed under Loan amount, $.
- Set the rate your lender quoted under Annual interest rate, %.
- Read Monthly payment (interest only) — the exact interest charge for that month, unchanging for as long as the balance doesn't.
- Check Principal due at end of interest-only period — it always equals what you entered, because nothing paid here reduces it.
Worked example — a $300,000 loan at 6%
Borrow $300,000 at a 6% annual rate. The monthly rate works out to 6 ÷ 1200 = 0.5%, and multiplying that by the untouched $300,000 balance gives a payment of exactly $1,500.00 every month for as long as the interest-only period runs — no compounding, no rising or falling figure, because the balance the interest is charged on never changes from one month to the next.
A standard 30-year amortizing mortgage on the same $300,000 at 6% would run about $1,798.65 a month, roughly $299 more, since part of that payment retires principal. Here the gap goes to cash flow instead, and the price is Principal due at end of interest-only period showing the full $300,000 — not a dollar lower than the day the loan funded, due in full or recast into a new, higher amortizing payment the moment the interest-only window closes.
Questions
Why doesn't the balance go down during the interest-only period?
Because the payment is defined as exactly the interest accrued that month — principal times the monthly rate — with nothing added toward paydown. There is no amortization schedule running underneath it, so the amount owed on day one is the same amount owed on the last day of the interest-only window, which is why Principal due at end of interest-only period always equals Loan amount, $.
What happens when the interest-only period ends?
One of two things, depending on the loan's terms: the lender demands the untouched balance in a single lump sum, or the loan recasts into a fully amortizing payment over whatever years remain, landing noticeably higher than the interest-only figure because it now has to cover interest and retire the entire original principal in a shorter window. This sheet reports the balance either path starts from, not the recast payment itself.
How is this different from a balloon-payment loan?
A balloon loan's payment is still a normal amortizing payment sized against a long schedule, often 30 years, so its balance falls a little every month even though the loan matures early. An interest-only loan removes amortization entirely for its introductory period — the payment is pure interest, and the balance does not move at all until that window ends.
Who actually takes out an interest-only mortgage?
Real-estate investors and house flippers who plan to sell or refinance before the interest-only period ends use it to minimize the cash tied up in holding a property, and borrowers with irregular or commission-heavy income use it to keep the required payment low in lean months. Both are betting that income, property value, or refinancing terms will be more favorable by the time the full principal comes due.
Why is there no exponent in this formula when other mortgage calculators use one?
Standard amortization formulas raise (1 + rate) to the power of the number of payments because each month's interest is computed on a balance that shrank slightly the month before, and that compounding is what the exponent captures. An interest-only payment is charged on the same untouched balance every single month, so there is nothing to compound — simple multiplication is the entire calculation.
Does a lower interest-only payment mean the loan is cheaper overall?
No — it defers cost rather than removing it. Every dollar not paid toward principal during the interest-only period is still owed afterward, plus whatever interest accrues on it going forward, so total interest paid over the life of the loan is typically higher than an equivalent loan that started amortizing from the first payment.
References
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.