Interest-Only Payment
Interest-Only Payment
The periodic payment on an interest-only loan: the balance times the periodic rate. Nothing is repaid, so the balance is unchanged at the end of the interest-only period.
When to use: Use for interest-only mortgages, construction loans, lines of credit, and to see how much of any amortizing payment is pure interest at the outset.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| IOPayment | Interest-Only Payment | Periodic interest-only payment | $ |
| PV | Loan Balance | Outstanding loan balance | $ |
| k | Interest Rate | Annual interest rate | % |
| m | Payments per Year | Number of payments per year | integer |
Real-Life Examples
Example 1: Interest-Only Mortgage
A $400,000 interest-only mortgage at 6% with monthly payments.
Given
Step-by-Step
The borrower pays $2,000 a month and still owes $400,000 whenever the interest-only period ends. The fully amortizing payment on the same loan over 30 years would be about $2,398.
Example 2: Quarterly Commercial Line
A $1,000,000 line of credit at 4.5% with quarterly interest payments.
Given
Step-by-Step
Each quarter costs $11,250 to carry the full line. Drawing less reduces the payment in proportion.
Frequently Asked Questions
It is smaller by exactly the principal portion of the amortizing payment, which is why interest-only loans look cheaper month to month while leaving the whole balance to be repaid later.