Interest-only mortgages allow you to make only small monthly payments covering only the interest during the first year(s) of your mortgage. But since the principal never decreases during the interest-only period, interest-only mortgages can be surprisingly expensive in the long-run. Find out how much an interest-only mortgage will really cost, and how much you can save by shortening the interest-only term and making prepayments. |

**Mortgage Amount**: how much you are borrowing to buy the house. This is often roughly equal to the purchase price of the house. The calculator only lets you specify amounts between $100,000 and $1,000,000.

**Interest rate**: the interest you will be paying during the interest-only term, NOT the interest you may pay after the interest-only period is over (the calculator does not estimate those costs). The calculator lets you specify between 1% and 18% (though you will almost certainly not get either such a low or such a high interest rate).

**Term**: the amount of time you will pay only interest. The calculator lets you select from 1 to 10 years. (Five years is the most common term)

**Prepayments**: amounts you will pay against the principal before the official end of the interest-only term. Prepayments give you the flexibility to pay down the principal when you can afford to and pay only interest when you cannot.

**Prepayment amount**: amount you will prepay. The calculator only allows you to select a single amount for the sake of simplicity. In reality, you have the option to prepay more than the agreed-upon prepayment amount.
**Start Prepayment in Year**: Will you make the prepayment as soon as you take out the mortgage (year 1) or wait a year or more?

**Monthly payments**: The amount you will pay per month during the interest-only term.

**Total payments**: The amount you will have to pay, at minimum, in order to buy the house using the figures you have supplied. This amount is the interest paid in the interest-only term, plus the actual principal. It does not factor in the interest you might pay on the principal if you cannot pay it in full (few people can) when the interest-only period ends.

**Interest payments**: The amount you will pay during the interest-only term, not counting any fees.

**Summary**: how much you will pay total, broken down according to principal (balloon payment) and interest.

During the interest-only term, you do not pay anything toward the

However, if the value of the home goes up substantially, you will have the value of the increase in the property values over and above the original purchase price--something that can never happen while < href="renting.

By the same token, if the value of the home drops substantially, you will lose out just as much--something that can never happen while renting.

When the designated interest-only term ends, monthly payments toward principal and remaining interest begin. You may also simply pay the remaining balance all at once in a single

Monthly payments toward principal after the interest-only period may have a fixed or adjustable interest rate. A fixed-rate mortgage will lock in the lower interest rate when you first took out the interest-only mortgage (interest rates are at relative historic lows and so will likely increase over time). An adjustable-rate mortgage (ARM) will mean you will pay more interest when interest rates rise, though many ARMs limit how high the interest rate can go. You may make

- Borrowers who have the money to pay a traditional mortgage but who have a strong investment for the cash they save by not paying principal.
- Borrowers looking for the lowest possible monthly payment
- Borrowers whose main income is infrequent bonuses or commissions
- People who expect to greatly increase their income within a few years. Interest-only mortgages have historically been more common among lawyers and doctors just beginning a lucrative practice who want to pay down higher-interest educational debt before tackling a mortgage.