How to Calculate an Interest Only Mortgage or Loan

An "interest only" mortgage or loan is a debt with a periodic payment that is equal to the interest due. At the end of the term, the entire principal balance is due. There are variations that allows for some initial number of payments to be interest only payments followed by a set number of principal and interest payments. The Ultimate Financial Calculator can handle any variation of interest only calculations.

All users should work through the more detailed first tutorial to understand the Ultimate Financial Calculator's (UFC) basic concepts and settings.

This tutorial discusses how the "Cash Flow Options" are used to create 5 year loan with the first year's payments paying only the accrued interest. To create an amortization schedule with 12 initial interest only payments, follow these steps:

1. Set "Schedule Type" to "Loan"
   • Or click the [New] button to clear any previous entries.
2. Set "Rounding" to "Adjust last amount to reach "0" balance" by clicking on the {Settings} {Rounding Options}
3. In the header section, make the following settings:
   1. For "Calculate Method" select "Normal".
   2. Set "Initial Compounding" to "Daily".
   3. Enter 5.625 for the "Initial Interest Rate".

4. In row one 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 the "# Periods" to 1
      • Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is set, it will be cleared when you leave the row

5. Move to the second row. Initially, the regular payment amount is unknown.
   1. Select "Payment" for "Series"
   2. Set the "Date" to December 1, 2024
   3. Set the "Amount" to "Unknown"
   4. Set the "# Periods" to 12

6. Display "Options for Selected Cash Flow Series" window
   1. Click on the second row's "Cash Flow Options"
   2. Select the "Interest Only" tab at the top of the window. Fig. 1
   3. Be sure "Activate Interest Only series for the currently highlighted event" is selected
   4. Click [Save Changes]. Notice that the "Amount" column will now say "See Schedule".

7. Move to the third row of the cash flow input area. Initially, the regular payment amount is unknown.
   1. Select "Payment" for "Series"
   2. Set the "Date" to December 1, 2025
   3. Set the "Amount" to "Unknown"
   4. Set the "# Periods" to 48

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

8. Calculate the unknown. The result is $2,191.47. Fig. 3

9. To view an amortization schedule showing the initial interest only payments, click on the [Schedule] button. Fig. 4

An interest only loan can be structured so the interest only payments occur at any time during the term. And while interest only loans are not as popular as they once were, the calculations can easily be handled with the Ultimate Financial Calculator.