Interest-only loan transition
Pay only interest during the first phase, then amortize the unchanged principal over the entered repayment period.
How this works
Monthly interest-only payment = P × i, where P is principal and i = annual percentage rate/1200. The interest-only phase does not reduce P. The later payment amortizes that principal over n repayment months: M = P × i/[1 − (1+i)^(−n)], or P/n at zero interest. Total interest = interest-only payment × interest-only months + M × n − P.
Example
The illustration may use different inputs from the reproducible default inputs listed below.
At the defaults, $200,000 × 6/1200 = $1,000 interest per month during the first 60 months. The unchanged $200,000 is then repaid over the following 300 months. With all reset-default inputs, monthly interest-only payment: $1,000.
- Principal ($)
- 200000
- Annual rate (%)
- 6
- Interest-only months
- 60
- Repayment months after interest-only period
- 300
- Monthly interest-only payment
- $1,000
Scope and assumptions
Assumes the same fixed rate across both phases, no principal prepayments and no fees. The entered repayment months begin after the interest-only phase; they are not the total life of the loan. This is a scenario, not a loan offer or prediction of future rates.
Investor.gov — financial tools and calculators