The Dime Daily

Interest-Only Payment Calculator

By The Dime Daily Editorial Team · Published June 2025

Calculate your interest-only monthly payment and compare it to a fully amortizing one. See how much principal you're skipping — and what it costs long-term.

Skip the fluff — TL;DR

An interest-only payment on a $400,000 mortgage at 7% is $2,333/month — $768 less than the $3,101 fully amortizing payment. But you build zero equity during the IO period, and your payment jumps when it ends.

Interest-only payment

$2,333/mo

$28,000/year — 0% principal paydown

Fully amortizing (30-yr)

$2,661/mo

Builds equity with every payment

IO saves you $328/mo today

Over 30 years of IO payments, you'd pay $840,000 in interest and still owe $400,000.

How the interest-only payment is calculated

The formula is straightforward: Monthly IO payment = Loan balance × (APR / 12). On a $400,000 loan at 7% APR, that's $400,000 × (0.07 / 12) = $2,333/month. The fully amortizing payment uses the standard mortgage payment formula and spreads the same principal across the entire loan term.

The key trade-off: every IO payment you make is money spent on interest, not equity. If your home appreciates, your equity grows — but only from price appreciation, not from paying down your loan. If prices fall, you can end up underwater faster than with a traditional mortgage.

💰 Dime's Take

Interest-only looks attractive on a monthly basis and is a disaster on a decade basis. The lower payment is real. The zero equity accumulation is also real. Use this calculator to see both numbers side by side, then make an honest decision about which one matters more to your situation.

Frequently asked questions

An interest-only payment covers only the interest accrued on a loan for a given month — none of the principal. Your loan balance stays exactly the same after making an interest-only payment. Most mortgages are fully amortizing, meaning each payment reduces the balance. An interest-only period is a feature on some loans (typically 5–10 years) where you temporarily pay only interest, then the loan re-amortizes and payments rise sharply.

Interest-only periods make sense in narrow circumstances: (1) You're certain your income will rise significantly before the IO period ends (common with physicians, lawyers early in career). (2) You plan to sell the property before the IO period ends. (3) You're an investor using interest-only to maximize cash flow, with a clear exit strategy. They are almost never the right choice for primary residences for typical homebuyers — the lower payment is real, but you build zero equity during the IO period.

When the interest-only period ends, your loan re-amortizes over the remaining term. Your payment jumps — sometimes significantly — because you now have to pay off the same original principal in fewer years, plus interest. If you had a $400,000 IO mortgage at 7% for 10 years and then have 20 years left, your payment goes from $2,333/mo (IO) to $3,101/mo (amortizing) — a $768 monthly increase. This 'payment shock' catches many borrowers off guard.

No. An interest-only loan is a specific loan structure where you pay only interest for a defined period. A mortgage recast is a one-time modification to your existing fully amortizing loan: you make a large lump-sum principal payment, and your lender recalculates your monthly payment at the same rate and term. Recasting reduces your payment while keeping you on an amortizing schedule — you're still building equity.
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