Interest-Only vs. Principal & Interest Loan Calculator
Compare payment options to understand the short-term and long-term financial impacts
Key Insights
Interest-Only Loans offer lower initial payments but result in higher total interest costs. Traditional Loans build equity from day one but have higher initial payments.
Example: On a $250,000 loan at 5.5% for 30 years (5 years interest-only), you'd pay $1,145.83/month for 5 years (interest-only), then $1,703.37/month for 25 years, totaling $260,568 in interest. A traditional loan would cost $1,419.47/month for 30 years with $261,009 total interest.
1. Introduction
This calculator compares two loan payment structures:
Interest-Only (IO): Pay only interest for a set period (lower initial payments)
Principal & Interest (P&I): Pay both principal and interest from day one (builds equity)
Useful for mortgages, business loans, and investment property financing decisions.
2. Key Differences
| Feature | Interest-Only Loan | Principal & Interest Loan |
|---|---|---|
| Early Payments | Lower (interest only) | Higher (principal + interest) |
| Equity Building | None during IO period | Immediate |
| Total Cost | Higher (longer interest accrual) | Lower |
| Risk Level | Higher (payment shock later) | Lower |
3. Calculator Inputs
Common Inputs:
Loan amount ($)
Interest rate (%)
Loan term (years)
Interest-only period (years) [for IO loans]
Example Scenario:
$400,000 loan
6% interest rate
30-year term
5-year interest-only period
4. Calculation Formulas
Interest-Only Payments
Monthly Payment = (Loan Amount × Interest Rate) ÷ 12
$400,000 × 6% ÷ 12 = $2,000/month for first 5 years
P&I Payments
Monthly Payment = P × [r(1+r)^n] ÷ [(1+r)^n - 1]
P = Principal ($400,000)
r = Monthly interest rate (6% ÷ 12 = 0.005)
n = Total payments (30 × 12 = 360)
$400,000 × [0.005(1.005)^360] ÷ [(1.005)^360 - 1] = $2,398/month
5. Payment Comparison
| Year | Interest-Only | P&I | Notes |
|---|---|---|---|
| 1-5 | $2,000 | $2,398 | IO saves $398/month initially |
| 6-30 | $2,735* | $2,398 | IO payment jumps 37% higher |
*After 5 years, IO converts to 25-year P&I at original loan amount
6. Long-Term Impact
| Metric | Interest-Only | P&I | Difference |
|---|---|---|---|
| Total Interest | $539,000 | $463,000 | +$76,000 |
| 5-Year Cost | $120,000 | $143,880 | -$23,880 |
| Year 6 Payment | $2,735 | $2,398 | +$337 |
| Equity After 5Y | $0 | ~$35,000 | -$35,000 |
7. When to Choose Each Option
Interest-Only is Better When:
You need cash flow flexibility now
Planning to sell before IO period ends
Expecting higher future income
Using for investment properties
P&I is Better When:
Building long-term equity is important
You want predictable payments
Concerned about future payment increases
Primary residence financing
8. Advanced Considerations
Refinancing Risk: IO loans may be harder to refinance if property values drop
Amortization Shock: Prepare for 20-40% payment increases after IO period
Tax Implications: Mortgage interest deductions vary by loan type
Prepayment Options: Some IO loans allow principal payments without penalty
9. Try It With Your Numbers
To calculate your specific scenario:
Take your loan amount ______
Multiply by interest rate ______ ÷ 12 = IO payment ______
Use P&I formula or online calculator for comparison
Compare monthly savings vs. long-term costs
Example: For a $600,000 loan at 5.5%:
IO: $2,750/month first 5 years
P&I: $3,406/month
Decision depends on your 5-year plan and risk tolerance
