Interest-Only Loan Calculator
An interest-only loan lets you pay just the interest for a set number of years. After that, the payment rises, because the full amount must be paid back over the rest of the term. This shows both payments.
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How it works
During the interest-only years, the payment is the loan times the yearly rate, divided by twelve. The balance does not go down during that time.
After that period, the payment is the standard loan payment over the remaining years, on the full loan amount. Total interest is all the payments made, minus the amount borrowed.
Worked example
On a loan of $400,000.00 at 6.5% over 30 years in all, the interest-only payment is $2,166.67 a month for 10 years. After that the payment becomes $2,982.29 a month for the remaining years, and total interest is $575,750.21.
Questions
Why does the payment jump after the interest-only period?
The balance was never reduced, so the full loan is repaid over fewer years. That makes each payment larger.
Does interest-only mean I pay less overall?
Not usually. The total interest often ends up higher, because the balance stays high for longer.
Is this kind of loan common?
Some mortgages and construction loans use it. Ask any lender exactly how the payment changes.
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