How an interest-only mortgage payment is calculated
During the interest-only period the payment is one month of interest and nothing else, so the loan balance on the last interest-only payment is the same as on the first. Principal payments begin when that period ends, and they have to repay the whole balance in the years left on the term, which is why the payment rises even if the rate does not.
Interest-only payment = loan × annual rate ÷ 12$500,000 × 7.11% ÷ 12 = $2,962.50
Payment after the I/O period = B × r ÷ (1 − (1 + r)−n)B = $500,000, r = 0.005925, n = 240 → $3,909.58
A standard 30-year loan of the same amount would cost $3,363.53 a month from the start. After 10 years it would be paid down to $430,166; the interest-only loan would still owe $500,000.
A real example: the CFPB's interest-only Loan Estimate
The CFPB publishes a completed sample Loan Estimate for an interest-only adjustable-rate loan, and it shows the pattern clearly.[1] The loan is $211,000 for 30 years at 4% fixed for five years, then adjusting every three years by an index plus a 4% margin, with a 3.25% minimum and a 12% maximum rate:
| Payments | What is paid | Monthly principal and interest |
|---|---|---|
| 1–60 | Interest only at 4% | $703.33 |
| 61st payment | Principal starts; the rate can change | $1,028 to $1,359 |
| From the 169th payment | Highest possible payment | $2,068 |
Those numbers follow from the same formula: $211,000 over the remaining 300 months is $1,028 at the 3.25% floor and $1,359 at 6%, the most the rate can rise at the first change in the sample.
Interest-only period length and total interest
The longer the interest-only period, the bigger the later payment and the more interest you pay in total, because the balance stays high for longer. On $500,000 at 7.11% with a 30-year total term:
| Interest-only years | I/O payment | Payment after | Total interest | vs. standard loan |
|---|---|---|---|---|
| 5 | $2,963 | $3,569 | $748,468 | +$37,596 |
| 7 | $2,963 | $3,684 | $765,621 | +$54,750 |
| 10 | $2,963 | $3,910 | $793,799 | +$82,927 |
| Loan | Interest-only | Then | Standard 30-year |
|---|---|---|---|
| $300,000 | $1,778 | $2,346 | $2,018 |
| $500,000 | $2,963 | $3,910 | $3,364 |
| $750,000 | $4,444 | $5,864 | $5,045 |
| $1,000,000 | $5,925 | $7,819 | $6,727 |
Interest-only loans and the qualified mortgage rules
An interest-only mortgage cannot be a general qualified mortgage under Regulation Z: a qualified mortgage's regular payments may not allow you to defer repayment of principal, and its term may not exceed 30 years.[2] The lender still has to judge your ability to repay, and for an interest-only loan it must do so using the larger of the fully indexed or introductory rate and the payment that repays the loan over the term left once interest-only payments end.[2] In other words, the lender should qualify you on the second-phase payment that the calculator shows, not the first.
Prepayment penalties are allowed only on fixed-rate qualified mortgages that are not higher-priced, and never after three years.[3] Your Loan Estimate states on page 1 whether the loan has a prepayment penalty, interest-only payments or a balloon.[1]
Plan for the second paymentIf the later payment would not fit your budget today, do not count on refinancing before it starts: the CFPB's home loan toolkit says you probably shouldn't count on being able to sell or refinance.[5]
I/O loan calculator: paying principal anyway
The interest-only payment is a minimum, not a cap. If your note lets you prepay (the Loan Estimate's prepayment penalty line tells you whether a charge applies), every dollar of principal you pay lowers next month's interest and the payment that starts after the I/O period. To see the effect, run the extra payment calculator on the standard-loan version, or compare total costs with the mortgage payment formula. For a home equity line with an interest-only draw period, use the interest-only HELOC page; for the full monthly cost with taxes and insurance, the mortgage payment calculator.
Worked example
- Interest-only years: $500,000 × 7.11% ÷ 12 = $2,962.50 a month for 120 months, $355,500 of interest and no principal repaid.
- Months 121–360: $500,000 amortized over 240 months at 7.11% = $3,909.58 a month, $947.08 more than before.
- Total interest: $793,799, against $710,871 on a standard 30-year loan: the interest-only years cost $82,927 extra.
The 7.11% used here is Freddie Mac's 30-year fixed average for Nov 12, 2026,[4] a reference point only; interest-only loans are often adjustable, so test a higher rate for the years after any reset.
Frequently asked questions
How do you calculate an interest-only mortgage payment?
Multiply the loan balance by the annual rate and divide by 12. $500,000 at 7.11% is $2,962.50 a month.
What happens when the interest-only period ends?
Principal payments start and the whole balance is repaid over the remaining term, so the payment rises. In the example it goes from $2,962.50 to $3,909.58. On an adjustable loan the rate can change at the same time.[1]
Is an interest-only mortgage a qualified mortgage?
Not a general qualified mortgage: Regulation Z requires a qualified mortgage's payments not to defer repayment of principal.[2]
Does an interest-only loan build equity?
Not through payments during the interest-only years, because the balance does not fall. Equity changes only with the home's value or with extra principal you choose to pay.
Sources
- Loan Estimate: interest only, adjustable rate loan sample (form H-24(C))
- Regulation Z § 1026.43(c)(5) and (e)(2): ability-to-repay payment calculation and the qualified mortgage definition
- Regulation Z § 1026.43(g), limits on prepayment penalties
- Primary Mortgage Market Survey (PMMS)
- Your home loan toolkit: A step-by-step guide