Interest Only vs Amortizing Loan

An interest only payment is one period of interest charged on the current balance. Nothing more is added; nothing is subtracted from the principal. The same payment shows up every month for as long as the balance and the rate stay the same.

The full derivation lives in the interest only loan formula guide, with worked examples and edge cases. To run the formula on a specific loan in one step, use the interest only loan calculator.

An amortizing payment covers both the interest that accrued during the month and a piece of the principal. The payment itself is a fixed amount, but the split inside it shifts over time. Early in the loan, most of the payment is interest because the balance is large. Later, most of the payment is principal because the balance is small. By the final scheduled payment, the balance reaches zero.

The longer guide for that formula is how to calculate a loan payment. For a specific loan, the loan calculator returns the payment, total interest, and payoff time at once.

Same loan, two payment styles. Loan amount $250,000, annual rate 7 percent, term 30 years.

Interest only. Principal × annual rate ÷ 12 = 250,000 × 0.07 ÷ 12 = $1,458.33 per month. The balance after that payment is still $250,000.

Amortizing. Using M = P × r × (1 + r)^n / ((1 + r)^n − 1) with r = 0.07 ÷ 12 and n = 360, the payment works out to about $1,663.26 per month. Each month a small piece of that goes to principal, so the balance starts dropping from $250,000 right away.

Monthly difference. About $204.93. The interest only payment is lower at first because it does not reduce the principal balance. That gap pays for convenience in the short term and leaves the full $250,000 still owed at the end of the interest only period.

The interest only loan calculator includes a compare mode that runs both calculations side by side for any inputs.

The balance is the cleanest way to see the difference between the two payment types. On the same $250,000 loan at 7 percent:

• Interest only. The balance stays at $250,000 for the entire interest only period. Each monthly payment is exactly the interest charge for that month and nothing more.
• Amortizing. The balance declines a little every month, slowly at first and faster near the end. After year 1 of a 30 year amortization at 7 percent, the balance has dropped from $250,000 to roughly $247,500. After year 10 it is closer to $215,000. By the final scheduled payment it reaches zero.

Two payments of the same size on these two structures leave very different balances behind. The amortizing payment is doing two jobs each month; the interest only payment is doing one.

Interest only loans almost always end with a transition. What happens at that point is set by the loan contract, not by the formula, and it varies by lender. The common outcomes are:

• Payment resets to amortizing. The full balance starts amortizing over the remaining term. Because the principal has not been paid down, the new payment is higher than what the same loan would have cost as a regular amortizing loan from day one.
• Balloon payment. The entire remaining balance is due in a single payment on a specific date. Some commercial and bridge loan contracts work this way.
• Refinance. The borrower takes out a new loan that pays off the old one. Whether this is available, and on what terms, depends on the rate environment, the borrower's credit profile, and the lender's rules at that time.

None of these outcomes is automatic. The exact terms, fees, and timing are written into the original loan agreement.

• Assuming interest only means cheaper overall. The monthly payment is lower; the lifetime cost usually is not.
• Forgetting that principal is not being paid down during the interest only period. The balance is unchanged until something else pays it.
• Comparing only the first month's payment. The comparison only makes sense across the full horizon of both loans, including whatever happens after the interest only period ends.
• Ignoring fees, escrow, property taxes, homeowners insurance, PMI, and HOA on a mortgage. None of those are in the principal-and-interest payment, but all of them are part of the total monthly cost.
• Overlooking adjustable rate features. If the rate can change during or after the interest only period, both payment figures will change with it.
• Assuming every lender handles the end of the interest only period the same way. Reset, balloon, and refinance all exist; the contract decides which.

Pick the calculator that matches what you are trying to answer. The same loan amount and rate can go into more than one of these, depending on the question.

The rest of the money calculators cover related questions for payments, interest, and savings.