This interest-only mortgage calculator compares side-by-side the monthly payment for an interest-only mortgage to a conventional principal and interest mortgage. You can include taxes, insurance, PMI, and association dues to get a complete picture of the two mortgage payments.
Before you are tempted by the lower cost of an interest-only mortgage make sure you consider the risks. Rates on interest-only loans can change frequently while others are fixed for a 10-year period so read the fine print. Also, beware of balloon payments and/or negative amortization on some loans.
Compare Interest-Only Mortgages To Conventional Mortgages
Thinking about taking an interest-only mortgage but you’re not sure if it’s right for you?
There are many important points to consider beyond just the payment.
This Interest Only Mortgage Calculator makes it easy to compare both a fixed rate and interest only mortgage side-by-side. Simply enter the mortgage amount, mortgage interest rate, mortgage loan term, and perhaps a few of the optional variables, and you’ll find your monthly principal and interest payment for each mortgage.
You’ll also find some helpful advice below to help you better understand interest only mortgages and how they work so you can make the right decision for your situation. . .
Interest-Only Mortgages Vs. Traditional Mortgages
An interest-only mortgage is a type of loan where the mortgagor is only required to make payments covering the interest, but no principal. The interest-only period for these mortgages typically lasts 5 to 10 years, after which the mortgagor will start paying principal.
Traditional home mortgages have monthly payments that are allocated between the principal and interest creating amortization. Modern interest-only mortgages have no amortization unless you choose to pay more than the required monthly payment thus reducing principal.
Some people prefer interest-only mortgages because it frees up cash that can be diverted to other investments. The danger, however, is you make no progress on paying for your house thus delaying the entire amortization process and increasing the total cost for your home.
This Interest Only Mortgage Calculator will help you calculate how much interest should be paid monthly instead of paying both interest and principal every month. You’ll find that you’ll be paying less to start, but remember you’ll eventually need to pay off the principal as well.
Interest-Only Mortgage Pros And Cons
There are a number of benefits to an interest-only mortgage. Below are a few:
- Pay principal at will – If you have a fluctuating income, being able to pay principal only when you’re able increases your flexibility.
- Buy a bigger house – Instead of moving up to a larger house when you can afford it, interest-only mortgages allow you to buy that dream home right away because of the lower initial payments.
- Invest the difference – Interest-only mortgages, due to their lower initial payments, allow you to use more of your net income for investments.
- Payment changes when extra principal payments are made – If you put an extra $500 toward the principal of your mortgage one month then your next payment will drop (unlike conventional mortgages).
While there are benefits to keep in mind, be aware of a few downsides as well:
- Interest-only mortgages typically have higher interest rates – Lenders view interest-only mortgages as higher risk resulting in higher interest rates compared to conventional mortgages. Because you don’t build equity like a normal mortgage the default risk is higher.
- Some interest-only mortgages have balloon payments and negative amortization schedules – Check to make sure your interest-only mortgage is straightforward and free from hazards. You don’t want negative amortization increasing your principal with time.
- You’ll pay more interest in the long run – While you effectively lower your initial monthly payments with an interest-only mortgage, you will still pay more interest over the life of your loan term because you are effectively lengthening the term of your loan.
Consider these points carefully before signing up for an interest-only mortgage.
Interest-only mortgages can work for you if you properly manage your money. But they require a lot of discipline and focus so that you won’t be tempted to spend your extra income on unnecessary things.
Do your homework, shop around for the lowest rate. Complete the calculations above before making a decision. Seek advice from your financial advisor if there are some areas you are unsure of and find out if an interest-only mortgage is right for you.
Interest Only Mortgage Calculator Terms & Definitions
- Mortgage Payment – A regularly scheduled payment which includes principal and interest paid by the borrower to the lender of the home loan.
- Mortgage Amount – The total amount borrowed using a mortgage.
- Mortgage – The charging of real property by a debtor to a creditor as security for a debt (especially one incurred by the purchase of the property), on the condition that it shall be returned on payment of the debt within a certain period.
- Interest-Only Mortgage – A type of mortgage in which the mortgagor is only required to pay off the interest that arises from the principal that is borrowed.
- Loan Term – The duration of the loan, in this case, the mortgage.
- Interest Rate – The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
- Principal Amount – The original sum lent or borrowed.
- Amortization – The paying off of debt in regular installments over a period of time.
- Balloon Payment – An oversized payment due at the end of a mortgage, commercial loan, or other amortized loan (in this case, a mortgage).
- Negative Amortization – An increase in the principal balance of a loan caused by making payments that fail to cover the interest due.
- Real Estate Taxes – A tax assessed on real estate by the local government.
- PMI (Private Mortgage Insurance) – A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults.
- Association Dues – An amount billed by an entity such as a Homeowners Association for common uses such as utilities, landscaping, and general repairs and maintenance.
Related Mortgage Calculators:
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- Mortgage Payoff Calculator: How much extra payment should I make each month to pay off my mortgage by a specific date (and how much interest will I save)?
- Bi-Weekly Mortgage Calculator: How much interest will I save paying my mortgage biweekly instead of monthly? How much more can I save if add an extra payment?
- Mortgage Balance Calculator: What is my mortgage balance given the number of payments I’ve already made (or still need to make)?
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- Second Mortgage Calculator – Consolidate Savings With Refinance: How much will I save consolidating my first and second mortgages into a new first mortgage?
- Rent vs. Buy Calculator: Should I rent or buy? What’s the better deal?
- Mortgage Affordability Calculator: How much house can I afford if I paid the same amount in mortgage as I pay in rent?
- ARM Mortgage Calculator: How does an adjustable rate mortgage (ARM) compare to a fixed rate mortgage over the life of the loan (as opposed to just the teaser payment)?
- Balloon Mortgage Calculator: How much will I owe (balloon) at the end of the payment period?