Interest Only Loan Formula

The interest only payment is one period of interest on the current balance. Two equivalent forms of the same idea cover every case: the general form (any payment frequency) and the monthly form (the version most borrowers see in the United States).

1. Write the annual rate as a decimal. Divide the quoted percent by 100. For 7 percent, the decimal is 0.07.
2. Pick the payment frequency. Monthly loans use 12 periods per year, biweekly use 26, and weekly use 52. Divide the annual rate by that number to get the periodic rate.
3. Multiply the periodic rate by the current balance. The product is the interest charged for that one period. That is the interest only payment.
4. Repeat next period at the same balance. As long as the loan stays interest only and the balance does not change, the payment stays the same too.

Loan amount $250,000, annual rate 7 percent, monthly payments.

1. Annual rate as a decimal: 7 ÷ 100 = 0.07
2. Monthly rate: 0.07 ÷ 12 ≈ 0.005833
3. Monthly interest only payment: 250,000 × 0.005833 ≈ $1,458.33 per month

The totals during a 5 year interest only period:

• Total interest paid ≈ 1,458.33 × 60 = $87,500.00
• Principal remaining = $250,000 (unchanged)

The interest only loan calculator produces the same numbers for these inputs and can compare them side by side with an amortizing payment.

An interest only payment covers exactly one thing: the interest that accrued during the period. It does not pay down principal, and it does not cover anything outside the interest line of the loan.

What it does not include:

• Principal. The balance stays at the same dollar figure from one period to the next.
• Property taxes, homeowners insurance, PMI, and HOA dues on a mortgage. Those are billed separately or held in escrow.
• Origination fees, document fees, or any closing costs. Those are paid at closing or rolled into the loan balance, and once rolled in they earn interest like the rest of the principal.
• Future principal payments. Those start once the interest only period ends, either on a new amortization schedule or as a balloon payment, depending on the contract.

A regular fully amortizing loan payment covers both interest and principal each month. The principal slice grows over time, the interest slice shrinks, and the balance reaches zero on the final scheduled payment. The amortizing payment formula is M = P × r × (1 + r)^n / ((1 + r)^n − 1), and the how to calculate a loan payment guide walks through that math in detail.

An interest only payment skips the principal slice entirely. The payment is lower because of that, but the balance stays flat for as long as the interest only period lasts. To see the same loan figured both ways, compare the interest only payment with what the same balance would cost on the loan calculator or, for a mortgage, on the mortgage calculator.

Interest only payment math is used in several lending products. The formula is the same in each case; the surrounding contract is what changes.

• Interest only mortgages. The borrower pays interest only for a fixed introductory period, then the loan converts to fully amortizing payments for the remaining term.
• Construction loans. While a home or commercial building is being built, the borrower draws funds in stages and pays interest only on the drawn balance. The loan is typically refinanced into a permanent mortgage once construction is complete.
• Bridge loans. A short-term loan that finances the gap between buying a new property and selling an old one, often structured with interest only payments and a balloon at the end.
• Business and commercial loans. Some commercial real estate and business loans use interest only periods. The exact structure depends on the lender and the deal.

These are examples of where the math is used, not recommendations of any product. The right product for any borrower depends on credit profile, loan terms, fees, and the specifics of the deal, none of which are covered here.

• Forgetting to convert the percent to a decimal. 7 percent is 0.07, not 7. Multiplying by 7 instead of 0.07 inflates the payment by a factor of 100.
• Dividing by 100 twice. Some borrowers convert to a decimal once with the percent and a second time inside the formula. Pick one and stay consistent.
• Assuming the principal goes down. It does not, as long as the loan is interest only and no extra payment is applied to principal.
• Ignoring fees, escrow, taxes, and insurance on a mortgage. The interest only payment is just the interest line; the full housing cost is bigger.
• Overlooking adjustable rate features. If the rate can change during or after the interest only period, the payment will change with it.
• Forgetting the balloon. If the contract ends with a balloon, the entire remaining balance is due in one payment on a specific date, not spread across future months.

For a longer-horizon savings view, the future value calculator handles the related compound growth math, and the rest of the money calculators cover payments, interest, and savings for other common scenarios.