Interest-Only Payment Calculator
Calculate the exact monthly payment on an interest-only loan by applying your annual rate to the principal balance. Use this during the interest-only period of a mortgage, bridge loan, or construction loan.
About this calculator
On an interest-only loan, monthly payments cover only the interest accrued — the principal balance does not decrease during this period. The formula is: Monthly Payment = Principal × (Annual Rate / 100) / 12. Here, dividing the annual rate by 1200 converts it to a monthly decimal rate, and multiplying by the principal gives the dollar interest for that month. Because principal is untouched, the payment remains constant as long as the rate and balance are unchanged. Interest-only loans are common in bridge financing, commercial real estate, and as an introductory phase on some adjustable-rate mortgages (ARMs). After the interest-only period ends, the loan typically recasts into a fully amortizing payment that repays the full principal over the remaining term, causing a significant payment jump.
How to use
You take out a $500,000 bridge loan at an annual interest rate of 6.5%. Step 1: Convert the rate — 6.5 / 100 / 12 = 0.005417 per month. Step 2: Apply the formula — Monthly Payment = $500,000 × 0.005417 = $2,708.33. Step 3: Verify — over 12 months you would pay $32,500 in interest with zero reduction in principal. This figure helps you budget during a construction phase or while awaiting a property sale before switching to a fully amortizing loan.
Frequently asked questions
How does an interest-only loan payment compare to a fully amortizing payment?
An interest-only payment is always lower than a fully amortizing payment on the same balance and rate because it excludes any principal repayment. For example, on a $500,000 loan at 6.5% over 30 years, the fully amortizing payment is about $3,160/month, while the interest-only payment is $2,708/month — a $452 difference. However, the full principal remains due at the end of the interest-only period, requiring either a lump-sum payoff, refinance, or higher amortizing payments. Borrowers must plan carefully to avoid payment shock when the interest-only period ends.
When is an interest-only loan a good financial choice?
Interest-only loans make sense when cash flow during a transitional period is a priority and you have a clear plan to retire the principal. Common use cases include real estate investors who plan to sell or refinance before amortization begins, business owners managing short-term cash flow, and borrowers expecting a large income event like a bonus or asset sale. They are also used in construction loans where the full loan isn't drawn immediately. They are generally not advisable as long-term financing because you build no equity through payments.
What happens to my principal balance during an interest-only period?
Your principal balance remains completely unchanged during the interest-only period — every payment goes entirely to interest. This means you build zero equity through your payments, though your equity can still grow if the property appreciates in value. Once the interest-only period expires, the remaining principal is typically amortized over the residual loan term, which is now shorter, resulting in a higher monthly payment than if the loan had been amortizing from day one. Borrowers who do not plan for this payment increase can face financial strain.