Interest-Only Mortgage Calculator
What is an interest-only mortgage?
An interest-only mortgage is a loan with monthly payments only on the interest of the amount borrowed for an initial term (typically seven to 10 years) at a fixed interest rate. The interest-only mortgage payment calculator shows what your monthly mortgage payment would be by factoring in your interest-only loan term, interest rate and loan amount. This means you get an estimated interest-only mortgage payment for the interest-only term. It doesn’t account for the principal payments when the loan begins amortizing.
How does an interest-only mortgage calculator work?
An interest-only 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:
(Interest rate % * Loan amount) / 12 = Monthly payment
So, if you have a 7 percent interest rate and a $400,000 loan, you’d plug in:
(0.07 * 400,000) / 12 = $2,333.33 monthly payment
Should you get an interest-only mortgage?
If you want to get an interest-only mortgage, you need to have a plan for what you’ll do once the interest-only payments end. Do you expect to be making more money by then to cover your increased payment? Do you plan to refinance or sell before then? Consider these pros and cons to help you make your decision:
Pros
- Smaller initial payment: You'll have a reduced payment for the intro period, freeing up your money for other purposes.
- Can get tax benefits: Because interest payments on your primary residence are tax-deductible (for loans up to $750,000), 100 percent of your interest-only mortgage is tax-deductible if you itemize.
- Great if you have variable income: A low initial payment can be good if you’re going through a period where your income is ebbing and flowing.
Cons
- Harder to qualify for: Interest-only mortgages have more stringent requirements, including a higher credit score, higher income and more cash reserves.
- Slower to build equity: Since you’re not paying down your principal during the interest-only period, your equity only grows if your home value goes up.
- Your payment can go up: Once the interest-only period ends, your payment can go way up.