Interest only mortgage calculator

An amortising payment does two jobs: it pays the interest and it retires a slice of the debt. An interest only payment does the first job alone. Twelve payments of $2,166.67 come to $26,000, and the $400,000 owed at the start is the $400,000 owed at the end.

That is not a defect of the product; it is the product. The payment is lower because the borrowing is not being repaid, and the repayment has to happen some other way: a sale, a refinance, or a later amortising period.

Every amortising payment formula needs a number of periods, because the payment size depends on how long there is to clear the balance. This one does not, because the balance is never cleared. Rate and balance are the only inputs.

It also means the payment moves with the rate rather than with time. On a variable rate line, a rate change feeds through to the payment immediately and completely. The HELOC calculator is the same arithmetic on a revolving balance.

Most interest only mortgages are interest only for a while and then recast onto the remaining term. The balance is unchanged, so the same debt has to be amortised over fewer years than the original schedule, and the payment steps up sharply at that point.

That step is the number to look at before the product is chosen, not the low payment before it. The loan payment calculator prices the amortising payment on the same balance and whatever term is left.

This is the interest charge on a balance at a rate, monthly and annually. Property tax, insurance and any mortgage insurance sit outside it, as they do on any mortgage, and PITI puts the four housing parts together. Principal is the balance this interest is charged on. This is educational material, not financial advice.