Interest-Only Mortgage Calculator
What is an interest-only mortgage?
An interest-only mortgage is a type of home loan that requires you to pay only the interest charges for a fixed period of time. For example, your monthly mortgage payment might include only interest, rather than principal and interest, for the first five years of the loan, which gives you the benefit of a lower payment initially. Once that introductory period is over, your payments will increase to include principal and interest.
How does an interest-only mortgage calculator work?
An interest-only mortgage calculator figures out the amount you’ll pay monthly during your interest-only term by multiplying your interest rate by the loan amount, then dividing it by 12. Here’s the formula:
So, if you have a 6.5 percent interest rate and a $400,000 loan, you’d plug in:
(6.5% * 400,000) / 12 = $2,166.67 monthly payment
Should you get an interest-only mortgage?
Before applying for an interest-only mortgage, think ahead to what you plan to do once you have to start paying down the principal. Once the interest-only period wraps up, your payment obligation can go up significantly. Carefully weigh the pros and cons:
Pros
- Lower payments to start: By delaying the repayment of principal, you’ll have a smaller bill each month during the interest-only period.
- Potential to purchase a different property: Since your payments will be lower, you may be able to consider higher-priced homes.
- Tax benefits: Because interest payments on your primary residence are tax-deductible (for loans up to $750,000 if you’re filing jointly), 100 percent of your interest-only mortgage is tax-deductible if you itemize.
Cons
- Those low payments don’t last forever: Once the interest-only period ends, your payment can go way up. If you’re not financially prepared for it, you may need to figure out how to refinance or sell the home.
- Slower pathway to accumulating equity: When you aren’t paying any money toward the principal, the only way to build any equity is if the fair market value of the home increases.
- Fewer options: There aren’t as many lenders that offer interest-only mortgages. Plus, even those that do may have more stringent eligibility standards, including a higher credit score, higher income and more substantial cash reserves.