Formula
During the interest-only months, the payment is one month of interest and the balance does not fall. After that, the original balance is amortized over the remaining months:
Interest-only payment = balance × annual rate / 12
The later payment uses the standard fixed-rate formula for the months that are left.
Assumptions
- The interest-only period comes first and cannot use the entire term.
- The rate stays fixed, and unpaid principal does not grow during the interest-only period.
- Fees, balloon payments, and covenants are not included.
Worked example
A $50,000.00 loan at 8% for 5 years with 1 year interest-only has an initial payment of $333.33, then $1,220.65. Total interest is $12,590.92.
Input definitions
- Interest-only months
- Months when you pay interest and the principal balance stays the same.
- Total term
- Interest-only months plus the months used to repay principal.
Limitations
This is an estimate, not a financing offer. A lender may bill interest-only on a daily balance or require a balloon payment at the end.
Questions
What if the interest-only period is zero?
The result matches a standard fixed-rate loan for the full term.
Does the balance grow while I pay interest only?
No. This model pays the full monthly interest, so the principal stays flat until repayment begins.