How to Use the
Interest Only Calculator

The Interest Only Mortgage Calculator helps determine your monthly cash flow savings between a fully amortizing loan payment and an interest only loan payment.

In recent years, interest only mortgage loans have been wildly popular. But the credit crunch, combined with a depressed housing market, has made those loan products less desirable and harder to get.

However, if you still have an interest only loan and want to see how the monthly payments may be affected by changing interest rates, you can use the the Interest Only Calculator.

How Interest Only Loans Work

Let's say you have an interest only, 30-year fixed rate loan where you pay only the interest for the first 10 years. A fully amortizing loan would include payments toward interest and principal over the life of the loan. The interest only loan would:

• Not require any payments toward the principal for 10 years
• Have a balance that basically remains unchanged
• Have payments increase after 10 years to pay down the balance of the principal.

In the past borrowers often paid a rate premium of 1/8 percent to get the interest only option. Now, it's more common to see the interest only option offered at a higher premium. In some cases, borrowers may want to pay points to lower their interest rate.

Using Mortgage Calculators

So how does the Interest Only Calculator work? You plug in the full amount of your home loan and the interest rate you expect to pay. For example, an interest only 30-year fixed loan for $100,000 at 6.25 percent would have monthly payments of $520.83, according to the Mortgage Professor. The fully amortized version would require payments of $615.72.

However, many interest only loans have adjustable rates, so payments can change at any point over the life of the loan. You can play with the numbers to see how your monthly interest payments on an ARM will be affected as interest rates change.

Who Uses Interest Only Loans?

People who may benefit from using the interest only calculator are:

• Those who want the option of a lower payment because they have unpredictable income, such as the self-employed.
• Those who expect a large sum like a legal settlement or the sale of another home that they can use to reduce the loan balance
• Those who can only manage interest payments but anticipate their income rising at some point during the interest only period.

An interest only calculator can also be helpful for determining if refinancing into a fixed rate loan with full amortization is a good option. If you have an interest-only loan at a higher rate, and it's resetting to higher payments than you like, refinancing into a fixed rate can stretch the balance over 30 years and today's rates are low enough that you could get a more manageable payment.