Monthly Principal & Interest Payment (after IO period):
$0.00
Total Interest Paid Over Loan Term:
$0.00
Understanding Interest-Only Loans and Payoff
An interest-only (IO) loan is a type of mortgage where for a set period, the borrower only pays the interest accrued on the principal balance. This results in lower initial monthly payments compared to traditional amortizing loans. After the interest-only period concludes, the loan typically converts to a standard principal and interest payment structure, meaning borrowers then pay down both the interest and the principal balance over the remaining term.
How the Interest-Only Loan Payoff Calculator Works
This calculator helps you understand the financial implications of an interest-only loan, focusing on the payments during the interest-only phase and the subsequent principal and interest (P&I) phase, as well as the total interest paid over the life of the loan.
The calculations are as follows:
Monthly Interest-Only Payment: This is calculated by taking the principal loan amount, dividing it by the total number of months in the loan term, and then multiplying by the monthly interest rate.
Monthly Principal & Interest (P&I) Payment: After the interest-only period, the loan amortizes. The monthly P&I payment is calculated using the standard mortgage payment formula (the annuity formula), but applied to the remaining loan term (Total Loan Term – Interest-Only Period).
The formula for the monthly P&I payment (M) is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] Where:
P = Remaining Principal Balance (which is the original Loan Principal Amount)
n = Number of remaining payments (Loan Term in Years – Interest-Only Period in Years) * 12
Total Interest Paid: This is the sum of all interest payments made over the entire loan term.
Total Interest Paid = (Monthly Interest-Only Payment * Interest-Only Period in Months) + (Monthly P&I Payment * Number of P&I Months) - Loan Principal Amount Where:
Interest-Only Period in Months = Interest-Only Period in Years * 12
Number of P&I Months = (Loan Term in Years – Interest-Only Period in Years) * 12
When to Consider an Interest-Only Loan
Interest-only loans can be beneficial for borrowers who anticipate a significant increase in their income in the future, or who plan to sell the property before the interest-only period ends. They can also be useful for investors looking to maximize cash flow from a property during the initial period. However, it's crucial to understand the risk of significantly higher payments once the IO period ends and to ensure you can afford those future payments.
Disclaimer: This calculator provides an estimate based on the provided inputs. It does not account for fees, taxes, insurance, or potential changes in interest rates. Consult with a financial professional for personalized advice.
function calculateLoanPayoff() {
var loanAmount = parseFloat(document.getElementById("loanAmount").value);
var annualInterestRate = parseFloat(document.getElementById("annualInterestRate").value);
var loanTermYears = parseInt(document.getElementById("loanTermYears").value);
var interestOnlyPeriodYears = parseInt(document.getElementById("interestOnlyPeriodYears").value);
var monthlyInterestOnlyPayment = 0;
var monthlyTotalPayment = 0;
var totalInterestPaid = 0;
// Input validation
if (isNaN(loanAmount) || loanAmount <= 0 ||
isNaN(annualInterestRate) || annualInterestRate 100 ||
isNaN(loanTermYears) || loanTermYears <= 0 ||
isNaN(interestOnlyPeriodYears) || interestOnlyPeriodYears loanTermYears) {
alert("Please enter valid numbers for all fields. Ensure interest-only period does not exceed loan term.");
return;
}
var monthlyInterestRate = (annualInterestRate / 100) / 12;
var totalMonths = loanTermYears * 12;
var interestOnlyMonths = interestOnlyPeriodYears * 12;
var remainingMonths = totalMonths – interestOnlyMonths;
// Calculate Monthly Interest-Only Payment
if (interestOnlyMonths > 0) {
monthlyInterestOnlyPayment = loanAmount * monthlyInterestRate;
} else {
// If IO period is 0, it's effectively a P&I loan from the start.
// We'll calculate the P&I payment and use it as the initial payment.
monthlyInterestOnlyPayment = 0; // No distinct IO payment if period is 0.
}
// Calculate Monthly P&I Payment for the remaining term
if (remainingMonths > 0) {
var rate = monthlyInterestRate;
var nper = remainingMonths;
var pv = loanAmount;
var numerator = rate * Math.pow(1 + rate, nper);
var denominator = Math.pow(1 + rate, nper) – 1;
if (denominator === 0) { // Avoid division by zero if rate or nper is 0 (edge case)
monthlyTotalPayment = pv / nper;
} else {
monthlyTotalPayment = pv * (numerator / denominator);
}
} else {
// If IO period equals loan term, there are no remaining months for P&I.
// The total paid will be the sum of IO payments.
monthlyTotalPayment = 0; // No P&I payment needed if loan is fully paid during IO period
}
// Calculate Total Interest Paid
var totalInterestPaidDuringIO = monthlyInterestOnlyPayment * interestOnlyMonths;
var totalPrincipalAndInterestPayments = monthlyTotalPayment * remainingMonths;
totalInterestPaid = totalInterestPaidDuringIO + totalPrincipalAndInterestPayments – loanAmount;
// Display results, formatted to two decimal places
document.getElementById("monthlyInterestOnlyPayment").textContent = "$" + monthlyInterestOnlyPayment.toFixed(2);
document.getElementById("monthlyTotalPayment").textContent = "$" + monthlyTotalPayment.toFixed(2);
document.getElementById("totalInterestPaid").textContent = "$" + totalInterestPaid.toFixed(2);
// Adjust display for cases where IO period is 0 or equals loan term
if (interestOnlyPeriodYears === 0) {
document.getElementById("monthlyInterestOnlyPayment").textContent = "N/A (P&I from start)";
}
if (remainingMonths <= 0) {
document.getElementById("monthlyTotalPayment").textContent = "N/A (Loan fully paid during IO)";
// Recalculate total interest if loan is fully paid during IO period
totalInterestPaid = monthlyInterestOnlyPayment * totalMonths – loanAmount;
document.getElementById("totalInterestPaid").textContent = "$" + totalInterestPaid.toFixed(2);
}
}