How to Use an Interest Only Loan Payment Calculator to Figure Out Your Monthly Payments

Taking out a loan can be stressful, especially if you’re trying to figure out how much the monthly payments will be Interest only loans can make this even more confusing since you’re not paying anything towards the principal balance during the introductory interest-only period Luckily, there are handy interest only loan payment calculators available online to help estimate your monthly costs.

In this article, I’ll explain what an interest only loan is, how these unique calculators work, and walk through examples using real mortgage rates to estimate payments. Read on to learn how to leverage interest only calculators to gain a clear picture of your potential loan costs.

What Are Interest Only Loans?

With a typical amortized loan like a mortgage or auto loan your monthly payment covers both interest charges plus paying down the principal balance. This gradually pays off the full loan amount over the life of the loan.

Interest only loans work differently – your monthly payments only go towards interest for an initial period, usually 5-10 years. You’re not paying down principal during this introductory term.

Once the interest only period ends, payments recast to cover interest plus principal amortization, similar to a normal loan. This increases the payment since you now have to pay back the full balance you originally borrowed.

Banks offer interest only loans because they result in more interest income. Borrowers can use them to lower payments temporarily if they plan to pay off or refinance the balance later. They are more common for adjustable rate mortgages and home equity lines of credit.

How Interest Only Calculators Estimate Payments

Interest only loan calculators use a simple formula to estimate your monthly costs based on the interest rate and loan amount:

(Interest Rate x Loan Amount) / 12 Months = Monthly Payment

For example, say you take out a $300,000 mortgage at 5% interest on a 10 year interest only period:

(0.05 x $300,000) / 12 = $1,250

So your estimated monthly payment would be $1,250 during the interest only term.

Most interest only calculators require you to input:

• Loan amount
• Interest rate
• Length of interest only period

They then display the interest only monthly payment. Some also show the increased payment once principal is added.

You can adjust the inputs to see how different loan amounts, rates, and terms impact your payments.

Interest Only Mortgage Payment Example

To see how an interest only calculator works in real life, let’s estimate payments on a $250,000 mortgage in Ashburn, VA using current rates:

Loan Amount: $250,000

Interest Rate: 6.5%

Interest Only Term: 10 years

Plugging this into an interest only mortgage calculator gives an estimated monthly payment of $1,354 during the 10 year IO period.

Once the interest only term ends, the payment would jump significantly to cover principal – potentially $1,768 per month using a 20 year amortization.

So while the interest only period saves you $414 per month, you take on higher long term costs by deferring principal payments.

Should You Consider an Interest Only Loan?

Interest only loans can be attractive for temporarily lowering payments. But proceeding with caution is advised due to the risks:

Pros

• Lower monthly payments
• Pay only interest during intro period
• Interest may be tax deductible

Cons

• You don’t build equity
• Payment jumps after interest only term
• Higher long term costs overall

Before moving forward, have a plan for paying off the balance when the term ends. Interest only loans are best suited for borrowers who expect their income to increase substantially or plan to sell or refinance.

Carefully run the numbers using an interest only calculator to see if the short term savings outweigh the long term tradeoffs for your situation.

Other Features of Interest Only Calculators

Most interest only loan calculators offer additional useful features beyond just estimating monthly payments:

• View interest costs for different periods – You can see interest costs for monthly, annually, or the full loan term.

• Calculate interest on other types of loans – Auto, personal, and home equity loans also offer interest only options. The calculators work for any loan type.

• Show amortized payments after interest only period – See how much your payment increases once principal is added.

• Handle adjustable rate mortgages – Interest only ARM calculators factor in potential rate changes.

• Allow extra principal payments – See how additional payments impact interest costs.

• Provide amortization schedules – Show a full payment breakdown across the loan timeline.

Using these features provides deeper insight into how interest only loans work beyond just the introductory payment.

Summarizing the Benefits of Interest Only Calculators

Here are some key benefits of using an interest only loan calculator:

• Estimates your monthly payments accurately during the interest only period when you are only paying interest

• Allows you to adjust inputs like loan amount, interest rate, and term length to see payment impact

• Calculates interest only costs for any type of loan such as mortgages, personal loans, HELOCs

• Displays interest amount for different timeframes (monthly, annually, total interest)

• Can factor in potential rate changes for adjustable rate mortgages

• Shows payment increase once principal is added after interest only period ends

• Provides full amortization schedules and allows extra principal payments

Overall, interest only calculators offer an easy way to understand how these unique loans work and estimate your monthly payments. I recommend testing different scenarios to see if an interest only loan aligns with your financial situation.