Interest-Only Home Loan Calculator
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Explains what an interest only mortgage is, and helps you to determine the payment amount before and after it's converted to a conventional mortgage.

This free online Interest-Only Home Loan Calculator will calculate the before and after payments and the total cost of an interest-only home mortgage.

Plus, unlike other online interest only mortgage calculators, the interest-only home loan calculator on this page will also calculate the investment earnings lost by not choosing a principal and interest (PI) payment loan.

Note: If you only want to calculate a house payment that includes, principal, interest, taxes, insurance, and PMI, please visit the PITI Mortgage Calculator.

What is an Interest-Only Home Loan?

In case you're not familiar with it, an interest-only home loan (IO) is one that for the first several years of the loan term you only pay the finance charges as they come due. In other words, during this portion of the loan "repayment" the amount you owe to the lending institution stays the same as it was before you made your first payment.

Of course, after the IO payment term has expired, you will then need to convert the IO loan to a conventional PI mortgage, wherein you actually begin reducing the amount you owe to the mortgage company. And because you will be paying down the principal, the amount of your monthly mortgage payment will increase (is that something you want to look forward to?).

Looking at it another way, an IO home loan is a cleverly-devised home financing method that allows a real estate company to sell you more home than you can afford, while allowing the mortgage company to earn finance charges on higher loan balances that would not exist if home buyers only bought homes they could afford.

Ironically, the same mortgage company that accuses you of throwing money away by renting, has no problem at all with you sending them pure finance charge payments that buys you absolutely nothing. I for one wish they would call IO home loans what they really are, "Rent to Buy" offers.

How to Use Interest-Only Payments to Save a Fortune

Here is what I suggest to people who inquire about IO home loans.

First, calculate the IO loan payment using an interest-only home loan calculator like the one on this page.

Next, determine the size of a conventional mortgage that would result in a PI payment equal to the IO payment (the interest-only home loan calculator will do that for you). The result will be a house that will be more in line with what you can actually afford -- provided you have accurately forecasted the ongoing costs of owning the house (insurance, property taxes, utilities, maintenance, repairs, replacement costs, commute costs, etc.).

By reducing the size of the mortgage to allow you to make PI payments equal to the IO payment, at the end of the IO payment period your mortgage payment will remain unchanged. This results in a monthly savings equal to the difference between the IO payment and the higher post-IO payment.

Furthermore, because you are buying a smaller, more affordable home, you will start saving money immediately in the form of reduced house ownership costs (insurance, property taxes, utilities, etc.).

So what can you do with all the money you'll be saving? You could apply it to your mortgage to pay it off early. Or, you could use it to pay off high APR debt. Or, you could invest it to earn interest on finance charge savings. Or, you could combine it with the equity you are building and trade-up to a bigger house without having to borrow more money. The possibilities to save (earn) money using this idea are endless.

With that, let's use the Interest-Only Home Loan Calculator to calculate the before and after payments and the total cost of an IO mortgage, and then build a numerical case for the money-saving PI alternative I just covered.

Interest Only Mortgage Payment Calculator
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Instructions: Enter the home loan amount, the annual percentage rate (APR), and the home loan term in years.

Next enter the interest-only period in years and the percentage return you expect to earn on your investments, then click the "Calculate Monthly Mortgage Payments" button.

Mouse over the blue question marks for a further explanation of each entry field. More in-depth explanations can be found in the glossary of terms located beneath the Interest-Only Home Loan Calculator.

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Help Home loan amount ($):
Help Annual interest rate (%):
Help Term of the home loan in years (#):
Help Interest-only term in years (#):
Help Expected return on investments (%):
Interest-Only Home Loan
Help Monthly IO mortgage payment:
Help Monthly payment after IO period:
Help Total IO home loan interest cost:
Alternative to Interest-Only Home Loan
Help More affordable principal and interest loan amount:
Help More affordable home loan interest cost:
Help Interest savings over IO home loan:
Help Future value of invested interest savings:
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Interest-Only Home Loan Calculator Glossary of Terms

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Home loan amount: The dollar amount of the home loan (principal amount).

Annual interest rate: The annual percentage rate (APR) of the home loan. Enter as a percentage (for .06, enter 6%).

Term of the home loan in years: The term of the home loan in number of years.

Interest-only term in years: The number of years you will be making the interest-only (IO) payments.

Expected return on investments: The annual percentage return you expect to earn on your future investments. Enter as a percentage (for .06, enter 6%).

Monthly IO home loan payment: This how much your monthly IO payment will be. This does not include property tax or insurance payments.

Monthly payment after IO period: This is what your monthly payment will increase to once the interest-only payment period has expired.

Total IO home loan interest cost: This how much finance charges you will pay on the interest-only house loan after making all payments for the term entered.

More affordable principal and interest loan amount: Based on the IO payment amount, this is the size of a conventional PI mortgage you could take out for the same monthly payment. In other words, at this loan amount you would be making the same payment as the IO payment amount, but in this case you will be paying down on the principal balance instead of letting it sit there to earn money for the mortgage company.

More affordable home loan interest cost: This is how much finance charges you would pay if you purchased a smaller home with the more affordable loan amount and made monthly principal and interest (PI) payments.

Interest savings over IO home loan: This is how much finance charges you could save from buying a smaller home with a more affordable loan amount and making PI payments versus a larger loan amount with IO payments.

Future value of invested interest savings: If you invested the difference between the interest-only payment and the post-interest-only payment, this could be the future value of your investment once the mortgage is paid off.

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