After practically disappearing during the Great Recession, interest-only mortgages are making a comeback. For some borrowers, an interest-only mortgage can offer an attractive way to minimize their mortgage payments while preserving the option to make payments against loan principle when they wish.

This Interest-Only Mortgage Calculator is designed to help you figure out the costs and payments associated with an interest-only mortgage. It will show you how much you can reduce your loan balance by making additional payments and the interest you can save by doing so.

Enter your information in the fields below, then using the sliding controls to experiment with how changing your prepayments, interest rate, length of interest-only period, etc. to see how they affect your results.

How to use the Interest-Only Mortgage Calculator

Here's how it works:

  1. Use the slider to set your intended mortgage amount, or just type it into the box
  2. From the drop-down list, select the number of years you believe you will need to pay off your mortgage
  3. Choose the number of years that will make up the Interest Only phase of the mortgage repayment plan, and the Interest rate
  4. Click Prepayments to input any additional payments you plan to make during the Interest Only phase.

When you click Calculate, you will see what your monthly payments will be during the initial, interest-only phase of the loan. Then, click View Report to see how your repayment plan will look throughout the duration of your mortgage. This will include the projected increase during the amortization phase of the mortgage, as you begin paying down the loan principal.

 

About interest-only mortgages

As the name indicates, an interest-only mortgage is one where you only pay the interest charges. You don't have to make any payments against the loan principle, at least not initially. However, after a certain length of time, often 5-10 years, you do have to begin paying down the balance on the loan. An interest-only calculator like this one can help you predict what those payments will be.

Interest-only mortgages offer some significant advantages for the right kind of borrower. By requiring only minimal monthly payments, they're a good choice for borrowers who don't want to tie up a lot of money in a mortgage or for borrowers who want the flexibility to pay more or less each month as their finances allow. But you do have to begin making payments against principle eventually, so you need to plan accordingly.

Here are some examples of the type of borrower who might benefit from an interest-only mortage:

  • Someone who only plans to stay in the home a few years before moving on, so they don't want to tie up a lot of money in a mortgage
  • A borrower with an irregular income, such as from a seasonal business, so they wish to be able to minimize payments when they wish, then make payments against loan principle when they are able to
  • A young person with a limited income now, but who has a high degree of confidence they will be earning much more in the near future, such as a medical student.
  • Financially sophisticated borrowers who would rather invest their money elsewhere rather than building home equity

Someone for whom an interest-only mortgage might not be a good choice? A first-time homebuyer who can't afford a full house payment or a repeat buyer trying to stretch their money to buy a more expensive home than they can really afford. Eventually, those loan principle payments are going to come due with a potentially big increase in monthly mortgage payments, and you have to be prepared for them.

That's why it's helpful to have a tool like this interest-only mortgage calculator. It allows you to anticipate what your mortgage payments will be and how much you can reduce them by making additional payments against principle during the interest-only phase.

 

Can you still get an interest-only mortgage?

Interest-only mortgages were popular in the early 2000s, along with other types of creative financing. Unfortunately, they were frequently marketed in ways that made them risky, such as requiring little to no down payment or marketing them to borrowers who were ill-prepared to handle principle payments once the interest-only phase ended.  This caused many to get into financial difficulty when home values fell and they had no cushion of equity to fall back on.

But interest-only mortgages have been around for a long time, and can be a sensible option for borrowers who are prepared for the end of the interest-only phase.  And there are more safeguards in place these days to ensure that borrowers are qualified for an interest-only loan.

These days, most lenders require a down payment of 20-30 percent on for an interest-only mortgage, so there's an equity cushion if home values fall. You'll also need a decent credit score, about 660 or higher, in most cases.  Most lenders will also want to ensure that you'll have adequate income to cover the principle payments when that time comes.

 

Notes on the Interest-Only Mortgage Calculator

This Interest Only Mortgage Calculator will work out your payments for both phases of an interest-only mortgage: both interest-only and full amortization, the latter being when you're paying both interest and principle.  These calculations are based on your loan amount, interest rate, the loan term (length) and the length of the interest-free period.

You can also use the interest-only calculator to determine the effects of making prepayments against mortgage principle during the interest-only phase.  The calculator will show you how much faster you can pay off the loan by making prepayments, as well as how much interest you can save by doing so.

For example, on a $250,000 mortgage amortized (repaid) over 30 years with the first 10 years interest-free, with a 4 percent mortgage rate, you could save almost $36,000 in interest by paying an extra $200 a month during the interest-only phase.

The calculator's amortization table can also show you how much equity you can build up by making prepayments.  This is helpful if you think you may relocate or refinance before the end of the prepayment phase.

 

Who might use this calculator?

An interest-only mortgage calculator is useful for a variety of situations, including the following;

  • Are thinking of  an interest-only mortgage but want to see how the costs will play out
  • Figuring out what your monthly payments will at different stages of the loan
  • Seeing the effects of  prepayments on how much interest you'll pay over the life of the loan
  • Calculating how varying the length of the interest-only period affects your loan payments later on
  • Want to see how much faster you can pay off your loan by making prepayments

 

Why is the total interest higher than that of a standard mortgage?

The total interest paid is higher on interest-only mortgages because during the first phase of the loan, you're not reducing the loan principle (unless you make prepayments). And if you're not paying down the principle, you're still paying interest on the full amount of the loan each month. So 4% of $250,000 is the same in the first year of the term as it is in the fifth, unless you make prepayments.

 

I have my results – now what?

Once you have your results, the next step is to start getting personalized quotes from lenders to see what sort of rates they're offering and see if you prequalify.  An easy way to do it is through  our Get a FREE Quote option. Answer a few simple questions and have the lenders come to you, rather than you looking for them.

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