Interest vs. Principal & Interest Mortgage Calculator

Interest-Only vs. Principal & Interest Mortgage Calculator

Compare the costs and benefits of interest-only loans versus traditional principal and interest mortgages

Loan Details

Loan Amount

Interest Rate (%)

Loan Term (Years)

Interest-Only Period (Years)

Payment Comparison

Interest-Only Payment

$0.00

Monthly payment during interest-only period

P&I Payment After

$0.00

Monthly payment after interest-only period

Standard P&I Payment

$0.00

Monthly payment for full P&I loan

Payment Comparison Over Time

Cost Comparison

Metric	Interest-Only Loan	Standard P&I Loan	Difference
Initial Monthly Payment	$0.00	$0.00	$0.00
Total Interest Paid	$0.00	$0.00	$0.00
Total Cost	$0.00	$0.00	$0.00
Loan Term	0 years	0 years	0 years
Equity After 5 Years	$0.00	$0.00	$0.00

Understanding Loan Types

Interest-Only Mortgages:
- Pay only interest for an initial period (typically 5-10 years)
- Lower initial payments but no equity buildup during interest-only period
- After interest-only period, payments increase significantly to cover principal
- Total interest paid is higher than standard loans

Principal & Interest (P&I) Mortgages:
- Pay both principal and interest from the start
- Higher initial payments than interest-only loans
- Build equity immediately with each payment
- Total interest paid is lower than interest-only loans

When to Consider Interest-Only:
- Expecting significant income growth in the future
- Planning to sell before interest-only period ends
- Need maximum cash flow flexibility now
- Investing the payment difference elsewhere

Risks of Interest-Only:
- Payment shock when principal payments begin
- No equity buildup during interest-only period
- Higher total interest costs
- Property value may not appreciate as expected

This calculator provides estimates only. Actual loan terms may vary by lender. Print Results

When choosing a mortgage, borrowers often decide between an Interest Only (IO) loan and a Principal & Interest (P&I) loan (also called a traditional amortizing loan). A mortgage calculator that compares these two options helps borrowers understand their repayment structure, monthly costs, and long-term financial implications.

1. Key Differences Between Interest Only and Principal & Interest Mortgages

Feature	Interest Only (IO) Loan	Principal & Interest (P&I) Loan
Repayment Structure	Only interest is paid for a set period (e.g., 5-10 years), then principal repayment begins.	Both principal and interest are paid from the start.
Monthly Payments (Initial Period)	Lower (only interest).	Higher (includes principal + interest).
Loan Balance	Remains unchanged during the IO period.	Gradually decreases over time.
Total Interest Paid	Higher (since principal is not reduced initially).	Lower (principal is paid down faster).
Risk Level	Higher (payment shock when IO period ends).	Lower (stable payments throughout).
Best For	Investors, short-term buyers, or those expecting higher future income.	Homeowners planning long-term ownership.

2. How an Interest Only vs. Principal & Interest Calculator Works

A mortgage calculator for these two loan types helps borrowers compare:

• Monthly payments during the IO period vs. P&I.

• Total interest paid over the loan term.

• Loan balance changes over time.

• Payment shock after the IO period ends.

Inputs Required:

• Loan Amount (e.g., $500,000)

• Interest Rate (e.g., 5%)

• Loan Term (e.g., 30 years)

• Interest-Only Period (e.g., 5 years)

• Comparison Period (e.g., 5, 10, or 30 years)

Calculations:

A. Interest Only Loan

• Monthly Payment (IO Period):
  $\text{Monthly Payment}=\frac{\text{Loan Amount}\times \text{Interest Rate}}{12}$
  Example: $\frac{500,000\times 0.05}{12}=\mathrm{\$}2,083.33$

• After IO Period Ends:
  Loan converts to P&I repayment over the remaining term (e.g., 25 years).
  New payment calculated using standard amortization.

B. Principal & Interest Loan

• Monthly Payment (Full Term):
  Uses the standard amortization formula:
  $M=P\times \frac{r(1+r{)}^n}{(1+r{)}^n-1}$
  Where:
  $M$ = Monthly payment
  $P$ = Loan amount
  $r$ = Monthly interest rate
  $n$ = Total number of payments

  Example:
  $M=500,000\times \frac{0.004167(1+0.004167{)}^{360}}{(1+0.004167{)}^{360}-1}\approx \mathrm{\$}2,684.11$

3. Example Comparison Over 5 Years

Loan Type	Monthly Payment (First 5 Years)	Loan Balance After 5 Years	Total Interest Paid (5 Years)
Interest Only	$2,083.33	$500,000 (no principal reduction)	$125,000
Principal & Interest	$2,684.11	~$463,000 (principal reduced)	~$112,000

Key Observations:

• IO loans have lower initial payments but no equity buildup.

• P&I loans cost more monthly but reduce principal faster.

• After the IO period ends, payments increase significantly (payment shock).

4. Pros and Cons of Each Loan Type

Interest Only Mortgage

✅ Pros:

• Lower initial payments (improves cash flow).

• Useful for investors relying on property appreciation.

• Flexibility (if expecting higher future income).

❌ Cons:

• No equity buildup during IO period.

• Risk of payment shock when IO period ends.

• Higher total interest paid over the loan life.

Principal & Interest Mortgage

✅ Pros:

• Builds equity from day one.

• Predictable payments.

• Lower total interest cost.

❌ Cons:

• Higher monthly payments from the start.

• Less cash flow flexibility.

5. Who Should Use Which Calculator?

• Investors & Flippers → Interest Only (short-term strategy).

• Long-Term Homeowners → Principal & Interest (stable equity growth).

• Borrowers Expecting Higher Income Later → IO (temporary lower payments).