How to Calculate an Interest Only Mortgage or Loan

An “interest-only” mortgage or loan is a debt with periodic payments equal to the interest due. At the end of the loan term, the full principal amount must be repaid. Some loan types allow for an initial period during which only interest is paid, followed by a period with both principal and interest payments. The Ultimate Financial Calculator can support any variation of interest-only payment structures.

All users should first complete the more detailed first tutorial to understand the basic concepts and settings of the Ultimate Financial Calculator (UFC).

This tutorial explains how to use the Cash Flow Options to model a 5‑year loan in which payments during the first year cover only accrued interest. To create an amortization schedule with 12 initial interest-only payments, follow these steps:

1. Set Schedule Type to Loan.
   • Alternatively, click New to clear any previous entries.
2. Click Settings, then select Rounding Options. Set “Rounding” to Adjust last amount to reach “0” balance.
3. 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.

4. 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 a frequency is entered, it will be automatically cleared when you leave the row.

5. Move to row 2. At this point, the regular 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.
   4. Set “# Periods” to 12.

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

7. Move to row 3 in the cash‑flow input area. At this point, the regular payment amount is unknown.
   1. Set “Series” to Payment.
   2. Set the “Date” to December 1, 2025.
   3. Set the “Amount” to Unknown.
   4. Set “# Periods” to 48.

Your screen will look like this (Fig. 2):

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

9. To view the amortization schedule with the initial interest‑only payments, click Schedule. See Fig. 4.

You can configure an interest‑only loan so the interest‑only period occurs at any point during the loan term. Although these loans are less common today, the Ultimate Financial Calculator makes it easy to compute and display interest‑only loan schedules.

Back to the Ultimate Financial Calculator.