This calculator will compute an interest-only loans accumulated interest at various durations throughout the year. These amounts reflect the amount which would need to be paid in order to maintain a constant principal balance.
For your convenience we list current Wilmington mortgage rates to help you perform your calculations and find a local lender. Calculator Rates
Interest-only loans allow borrowers to pay only the interest on the loan for a set period, which results in lower monthly payments. However, once the interest-only period ends, borrowers must start making principal and interest payments. Using an amortization calculator for interest-only loans can help you understand how payments change when the loan begins amortizing.
In this comprehensive guide, we’ll cover everything you need to know about amortization and interest-only loans, including:
- How interest-only loans work
- When the amortization period starts
- How amortization calculators work
- Tips for using an amortization calculator
- Things to consider before getting an interest-only loan
What Is an Interest-Only Loan?
With an interest-only loan the monthly payments only cover the interest due on the loan for an initial period, usually 5-10 years. The loan balance remains unchanged during this time since no principal is being repaid. Interest-only loans typically have
- Fixed interest rates
- Interest-only periods of 5, 7, or 10 years
- Payments that only cover interest
- Lower monthly payments during the interest-only term
Once the interest-only period ends, the loan starts amortizing, meaning a portion of each payment goes toward reducing the principal balance. This causes the payment amount to increase, often significantly.
Interest-only loans are commonly used for:
- Mortgages
- Home equity lines of credit (HELOCs)
- Some personal and business loans
When Does the Amortization Period Start?
The amortization period begins immediately following the interest-only term. For example:
- You get a 30-year mortgage with a 10-year interest-only period.
- For the first 10 years, you only pay interest.
- In year 11, amortization starts and you begin paying down principal.
- The loan will be fully paid off in the remaining 20 years.
Once amortization begins, the payment increases to cover both principal and interest. The amount of the increase depends on factors like the remaining loan balance, interest rate, and remaining repayment term.
How Do Amortization Calculators for Interest-Only Loans Work?
Amortization calculators allow you to see how your payment changes when the interest-only period ends. They factor in:
- Original loan amount
- Interest rate
- Length of interest-only term
- Remaining loan term after interest-only period
To demonstrate, let’s say you have a $200,000 mortgage at 5% interest with a 10-year interest-only term and 20-year amortization. Here’s how the calculations would work:
- Interest-only payment: $200,000 x 5% interest / 12 months = $833
- Remaining term after interest-only period: 20 years (240 months)
- Amortized payment: $224, calculated by amortizing $200,000 over 20 years at 5%
So your payment increases from $833 to $224 once the interest-only term ends.
Amortization schedules show the breakdown of principal and interest over the full repayment term This helps you see how the principal portion steadily increases as the loan balance decreases,
Tips for Using an Amortization Calculator
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Check multiple points in time – See how the payment changes immediately after the interest-only term ends a few years later, and at the end of the loan.
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Use an amortization schedule – Reviewing the full schedule helps you understand how principal and interest payments evolve.
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Change variables – See how different loan amounts, interest rates, and terms impact the payment.
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Compare options – Use the calculator to compare amortized payments for different interest-only periods.
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Plan ahead – Make sure you can afford the higher payment before committing to an interest-only loan.
Things to Consider Before Getting an Interest-Only Loan
Interest-only loans can provide payment flexibility in the short-term, but also carry risks:
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Your payment will increase substantially when principal payments start. Make sure you have a plan to handle the higher payment.
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You build equity slower since you aren’t paying down principal initially.
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Requirements are more stringent than standard loans. You’ll likely need excellent credit, income, and cash reserves to qualify.
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Rising interest rates can significantly increase your future payment if you have an adjustable-rate loan.
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Failing to pay off the balance when due results in amortization beginning automatically per the loan terms.
Carefully weigh the pros and cons and run the calculations to determine if an interest-only loan aligns with your financial situation and long-term goals.
See the Real Cost of Debt
The above calculator also has a second tab which shows the current interest rates on savings accounts. This further shows how expensive debt is because most forms of consumer debt charge a far higher rate of interest than banks pay savers AND savers get taxed on interest income they earn at their ordinary tax rates. The table below shows the full cost of $10,000 of debt at various rates of interest. While different consumer debt types typically have different amounts, we kept the amount column constant to show the absolute difference in cost per Dollar earned or borrowed. We also presumed interest-only payments on the debt & a 25% tax rate on income.
| Account Type | Amount | Rate | Annual Interest | After Tax Income | Required Income to Cover Interest Expense |
|---|---|---|---|---|---|
| Big Bank Savings | $10,000 | 0.02% | $2 | $1.50 | – |
| High-yield Savings | $10,000 | 4.00% | $400 | $300.00 | – |
| Certificate of Deposit | $10,000 | 5.00% | $500 | $375.00 | – |
| New Car, Good Credit | $10,000 | 6.49% | $649 | – | $865.33 |
| Used Car, Bad Credit | $10,000 | 10.90% | $1,090 | – | $1,453.33 |
| Credit Card | $10,000 | 21.52% | $2,152 | – | $2,869.33 |
| Personal Loan, Good Credit | $10,000 | 14.5% | $1,450 | – | $1,933.33 |
| Personal Loan, Bad Credit | $10,000 | 30.0% | $3,000 | – | $4,000 |
| Payday Loan | $10,000 | 400% | $40,000 | – | $53,333.33 |
Current Local Mortgage Rates
The following table shows current Wilmington 30-year mortgage rates. You can use the menus to select other loan durations, alter the loan amount, change your down payment, or change your location. More features are available in the advanced drop down
Adding an “Interest Only” Period to an Amortization Schedule, 1 of 2
FAQ
Can an interest-only loan be amortized?
How to calculate payments on interest-only loan?
How much is interest only on $250,000?
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250K Interest Only Mortgage
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2%
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4%
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10 years
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£417
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£833
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15 years
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£417
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£833
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20 years
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£417
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£833
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How much down payment for interest-only loan?