🏠 2026 Interest-Only Mortgage Calculator
Calculate the monthly payments for an interest-only (IO) mortgage and see the payment shock when the IO period ends. Compare IO vs. fully amortizing loans and understand the total interest cost.
What Is an Interest-Only Mortgage?
An interest-only (IO) mortgage allows you to pay only the interest on the loan for a specified period — typically 5, 7, or 10 years. During the IO period, your monthly payment is lower because it doesn't include any principal. However, no principal is paid down during this time — your loan balance stays flat.
After the IO period ends, the loan recasts into a fully amortizing loan. The remaining principal must be repaid over the shorter remaining term, causing a payment shock — the monthly payment jumps significantly.
How the Calculation Works
The interest-only payment formula is straightforward:
IO Payment = Loan Balance × (Annual Rate ÷ 12)
For example: $400,000 × (6.75% ÷ 12) = $2,250.00 per month
After the IO period, the fully amortizing payment is calculated using the standard amortization formula over the remaining term:
P&I Payment = P × [i(1 + i)^n] / [(1 + i)^n − 1]
Where P = principal balance, i = monthly interest rate, n = remaining months
Key Considerations
- No equity build: During the IO period, you build no equity through principal payments.
- Payment shock: Prepare for a significant payment increase when the IO period ends. On a $400,000 loan at 6.75% with a 10-year IO period, the payment can jump by $800+ per month.
- Higher rates: IO loans typically price 0.25–0.5% higher than comparable fully amortizing loans.
- DTI qualification: Lenders use the fully amortizing payment, not the IO payment, for debt-to-income qualification purposes.
- IO period reset: For ARM IO loans, both the rate and amortization reset simultaneously when the IO period ends.
Who Uses Interest-Only Mortgages?
IO loans can make sense in specific situations:
- Buyers who expect their income to rise significantly before the IO period ends
- Investors who want to maximize cash flow in the short term
- Borrowers purchasing in a market where they expect to sell before the amortizing period begins
They carry real risk, though, and are generally not the right fit for buyers who plan to stay in the home long term and need payment stability.
❓ Interest-Only Mortgage Calculator FAQ
What is an interest-only mortgage?
An interest-only mortgage allows you to pay only the interest for a set period (typically 5, 7, or 10 years). No principal is paid down during this time.
How is the interest-only payment calculated?
The formula is IO Payment = Loan Balance × (Annual Rate ÷ 12). For example, $400,000 at 6.75% = $2,250/month.
What happens after the interest-only period ends?
The loan recasts into a fully amortizing loan. Your monthly payment increases significantly because you must repay the full principal balance over the remaining term.
What is payment shock?
Payment shock is the sudden increase in your monthly payment when the IO period ends. On a $400,000 loan at 6.75% with a 10-year IO period, the payment can jump by $800+ per month.
Do I build equity during the IO period?
No. Since you're not paying any principal, your loan balance stays flat throughout the IO period.
Are interest-only loans more expensive?
Yes, IO loans typically price 0.25–0.5% higher than comparable fixed-rate P&I loans.
What rate does a lender use for DTI qualification?
Lenders use the fully amortizing payment, not the IO payment, for debt-to-income qualification purposes.
What happens if I have an ARM IO loan?
For ARM IO loans, both the interest rate and the amortization schedule reset simultaneously when the IO period ends.
Who should consider an interest-only mortgage?
IO loans may make sense for buyers expecting significant income growth, real estate investors seeking cash flow, or those planning to sell before amortization begins.
What are the risks of an interest-only mortgage?
Key risks include no equity build during the IO period, payment shock when amortization begins, higher interest rates, and potential underwater risk if home values decline.
Can I pay extra principal during the IO period?
Yes, most IO loans allow you to make extra principal payments if you choose. However, the required monthly payment remains interest-only.
What is the difference between IO and part-and-part mortgages?
An IO mortgage has a defined period with no principal payments. Part-and-part mortgages allow you to choose how much of your payment goes toward principal vs. interest each month.
Are interest-only mortgages common in 2026?
Interest-only products are seeing renewed interest in 2026, particularly for higher earners and investors, with some lenders offering IO options up to 60% LTV.
Is this calculator free?
Yes, this calculator is completely free to use. No registration or personal data storage is required. All calculations are performed in your browser.