How to Calculate an Interest Only Mortgage or Loan

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A Step-by-Step Tutorial
Tutorial 14

An interest-only mortgage or loan is a type of debt in which each periodic payment covers only the interest due. The full principal amount is repaid at the end of the loan term. Some loans allow an initial interest-only period, followed by a period with payments that include both principal and interest. The Ultimate Financial Calculator can handle any interest-only structure.

Before starting this tutorial, we recommend completing the more detailed first tutorial. It explains the essential concepts and settings used in the Ultimate Financial Calculator (UFC).

This tutorial explains how to use the to model a five-year loan. In this example, the first year has payments that cover only the accrued interest. To generate an amortization schedule with 12 initial interest-only payments, follow these steps:

Set Schedule Type to Loan.
- Alternatively, click to remove any previous entries.
Click , then select Rounding Options. Set Rounding to Adjust last amount to reach “0” balance.
In the header section, configure the following:
1. For Calculation Method, select Normal.
2. Set Initial Compounding to Daily.
3. Enter 5.625 for Initial Interest Rate.

In row 1 of the cash‑flow input area, create a Loan series.
1. Set the “Date” to November 1, 2024.
2. Set the “Amount” to 94,000.00.
3. Set “# Periods” to 1.
  - Note: Because the number of periods is 1, the frequency field will be disabled. If you enter a frequency, it will be cleared automatically when the row loses focus.

Go to row 2. At this stage, the payment amount is not yet known.
1. Set “Series” to Payment.
2. Set the “Date” to December 1, 2024.
3. Set the “Amount” to Unknown by typing U.
4. Set “# Periods” to 12.

Open the “Options for Selected Cash Flow Series” window.
1. Click the second row’s .
2. Select the Interest Only tab at the top of the window. See Fig. 1.
3. Confirm that the option labeled “Activate Interest Only series for the currently highlighted event” is selected.
4. Click . The “Amount” column will now show “See Schedule”.

Interest only option — Fig. 1—Interest Only option.

Go to row 3 in the cash‑flow input area. The payment amount is still unknown.
1. Set “Series” to Payment.
2. Set the “Date” to December 1, 2025.
3. Set the “Amount” to Unknown by typing U.
4. Set “# Periods” to 48.

Your screen should now appear as shown below (Fig. 2):

Interest only loan — Fig. 2—12 interest‑only payments followed by 48 principal‑and‑interest payments.

Click . The result is $2,191.47. See Fig. 3.

Interest only loan result — Fig. 3—Interest‑only loan result.

To view the amortization schedule with the interest‑only period, click . See Fig. 4.

Interest only loan schedule — Fig. 4—12 interest‑only payments.

You can configure an interest‑only loan so that the interest‑only period occurs at any point during the loan term. These types of loans are less common today, but the Ultimate Financial Calculator makes it easy to compute and display them.

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