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Interest Only Mortgage Calculator
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Interest Only Mortgage Calculator

Determine your monthly mortgage payment during the initial interest only period and potential future monthly mortgage payments for an interest only mortgage (interest only ARM). An interest only mortgage typically converts into an amortizing mortgage, usually an ARM, following the initial interest only period of the loan, which is three, five, seven or ten years. Our interest only mortgage calculator also allows you to understand the worst case scenario for an interest only mortgage by showing what the monthly mortgage payment and total interest expense over the life of the mortgage would be if the interest rate reached its maximum level as soon as possible in the adjustable rate period

Inputs

 

Outputs

Your monthly mortgage payment during the initial interest only period of the mortgage. Your payment during this period includes only interest and no principal
 

Current Fully-Indexed Rate Scenario

 
Current fully-indexed rate based on the current value of the interest only ARM index and margin. This is the value of the fully-indexed rate today, the value of the fully-indexed interest will likely change in the future
 
Initial mortgage payment during the adjustable rate period of the mortgage following the interest only period. Calculated based on the current fully-indexed rate
 
Total interest expense over the term of the mortgage based on using the current fully-indexed rate to calculate the monthly mortgage payment throughout the entire adjustable rate period of the mortgage
 

Worst Case Scenario

 
The maximum interest rate possible at the beginning of the adjustable rate period
 
Initial mortgage payment during the adjustable rate period of the mortgage; calculated based on the maximum interest rate possible at the beginning of the adjustable rate period
 
The maximum possible interest rate. Determined by the life cap of the mortgage
 
The first month when the maximum possible interest rate can be used to calculate the monthly mortgage payment. Determined by adjustment cap and life cap
 
Monthly mortgage payment based on the maximum possible interest rate over the life of the mortgage and the mortgage balance at that time
 
The worst case scenario -- total interest expense over the term of the mortgage calculated based on reaching the maximum interest rate as soon as possible
 
 
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Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
 
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Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
While we pride ourselves on the quality and breadth of the FREEandCLEAR mortgage calculators please note that they should be used for informational purposes only. Our calculators rely on assumptions by us and inputs and assumptions provided by you, which may be inaccurate. The outputs from our calculators are estimates only and should not be used as the sole basis for making any financial decisions. Always consult multiple financial professionals when determining the mortgage size and program that is appropriate for you.

What Borrowers Should Know About an Interest Only Mortgage

1

Interest Only Mortgage Basics

With an an interest only mortgage you pay only interest and no principal during the first three, five, seven or ten years of the loan, which is called the interest only period, and then loan converts into an amortizing mortgage and you pay both principal and interest for the remainder of the mortgage, which is called the adjustable rate period because your interest rate is subject to change.  Interest only mortgages are often referred to as 3/1, 5/1, 7/1 or 10/1 Interest Only ARMs (IO ARMs) with the first number indicating the length of the interest only period and the second number indicating how frequently the interest rate can change during the adjustable rate period.  For example, with a 5/1 IO ARM, you pay only interest at a fixed interest rate for the first five years of the loan and then you pay both interest and principal plus your mortgage rate is subject to change and potentially increase on an annual basis for the remaining 25 years of the mortgage.

2

Interest Rate for an Interest Only Mortgage

The interest rate for an interest only mortgage during the interest only period is set by the lender based on market conditions and negotiations with the borrower.  The interest only period interest rate is usually less than the rate for a 30 year fixed rate mortgage but higher than the rate for a comparable adjustable rate mortgage (ARM).  The interest rate during the adjustable rate period is called the fully-index rate and is determined by adding the index to the margin.  The margin is a set interest rate, usually between between 2.0% and 3.0%, that does not change over the course of your mortgage.  The index is an underlying interest rate, such as LIBOR or the treasury rate, that fluctuates based on economic factors.  Because you add the index to the margin to determine your mortgage rate, if the index increases, your mortgage rate increases but if the index decreases, your rate goes down.  If the fully-indexed rate increases, your mortgage payment increases as well.  Additionally, when your mortgage converts from an interest only loan to an amortizing loan, your mortgage payment typically increases because you start paying both principal and interest plus your interest rate can increase which would cause your payment to increase even more.

3

Benefits of an Interest Only Mortgage

Benefits of an interest only mortgage include a lower initial monthly mortgage payment as compared to a fixed rate mortgage or adjustable rate mortgage.  The lower monthly mortgage payment typically means that you can afford a larger mortgage amount with an interest only loan.  Additionally, interest only loans offer borrowers the flexibility to pay down their mortgage balance when they want to.   Borrowers can pay down their mortgage balance by any amount at any time over the course of the loan which is especially beneficial to borrowers who generate a significant portion of their income from a bonus.  Interest only mortgages can also be a good option for borrowers in a high interest rate environment.  In that scenario you pay a lower monthly payment initially and then you also benefit when your interest rate declines in the future.  Predicting interest rates is highly challenging and exposes borrowers to significant risk.

4

Negatives of an Interest Only Mortgage

Negatives of an interest only mortgage include the possibility that your monthly payment and interest rate jump in the future.  When your mortgage converts from an interest only loan to an amortizing loan, your mortgage payment typically increases because you start paying both principal and interest plus your interest rate can increase which would cause your payment to increase even more.  With some interest only mortgages your mortgage rate can increase by 50% or more at any adjustment period which causes your monthly payment to increase significantly.  In general, interest only mortgages are better suited for borrowers with a higher risk tolerance or who are going to sell their homes before the end of the interest only period.  Borrowers who value certainty and peace of mind should avoid the potential payment shock associated with an interest only mortgage.

More FREEandCLEAR Mortgage Resources

Mortgage Guides

How an Interest Only Mortgage Works

Review our comprehensive explanation of how an interest only mortgage works including key program terminology, reasons to select an interest only mortgage and informative examples

Programs

Downsides of an Interest Only Mortgage

Understand the key risks of an interest only mortgage including potential payment shock when borrowers are required to start paying both principal and interest

Resources

Interest Only Mortgage Rates

Review interest only mortgage rates in your area based on interest only period rate, credit score and other inputs.  Comparing interest only mortgage rates from multiple lenders is the best way to find the mortgage with the lowest rate and fees

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By clicking "GET FREE QUOTES," you authorize selected lenders and FREEandCLEAR to contact you using the information you provided. This authorization overrides any previous registrations on federal, state, or private Do Not Call registries or any private solicitation preference you previously expressed. You agree that lenders may use automatic dialing systems to make calls to any phone number entered, even to a cell phone or other service for which the called party is charged. You understand that consent is not a condition of purchase.