Fixed Rate Mortgage vs. Interest Only Mortgage
Interest-only payments are lower but build no equity. Compare them against a fixed-rate mortgage that pays down principal from day one.
A worked example
Running this tool on current national benchmarks (Federal Reserve / Freddie Mac via FRED (St. Louis Fed)) — swap in your own numbers to see how the result moves.
- Loan amount
- $350,000
- Interest rate
- 6.50%
- Loan term (years)
- 30
- Interest-only period (years)
- 10
but you build $53,284 less equity over 10 years
- Fixed payment$2,212.24
- Interest-only payment$1,895.83
- Monthly difference$316.40
How the lower payment with interest-only changes with loan amount
Holding the other inputs at the example above, here is how the result moves as loan amount changes.
| Loan amount | Lower payment with interest-only | Fixed payment |
|---|---|---|
| $175,000 | $158.20 | $1,106.12 |
| $275,000 | $248.60 | $1,738.19 |
| $350,000 | $316.40 | $2,212.24 |
| $525,000 | $474.61 | $3,318.36 |
| $700,000 | $632.81 | $4,424.48 |
The math behind it
The calculator prices the same loan two ways. The fixed-rate payment amortizes the loan over the term, paying down principal from day one. The interest-only payment is the loan balance times the rate divided by 12 — interest only, so the balance stays flat through the interest-only period. It then measures the equity the fixed loan builds over that period, which the interest-only borrower gives up in exchange for the lower payment.
Assumptions & limits
- Both options use the same rate, so the comparison isolates the effect of paying principal versus not. The interest-only balance does not shrink during the IO period.
- The equity given up is the principal the fixed loan would have repaid over the interest-only years.
- Payments are principal and interest (or interest only). Taxes, insurance, and mortgage insurance are excluded.
- The calculator holds the rate constant; it does not model an interest-only ARM whose rate could also reset.
Source: Freddie Mac PMMS via FRED. Annual averages; latest weekly reading shown.
Common questions
What do I give up by paying interest only?
Equity. Every fixed-rate payment repays some principal, steadily building ownership in the home. Interest-only payments build none during the IO period, so you keep the extra cash each month but forgo the equity — real wealth — the fixed loan would have accumulated.
When does interest-only make sense despite that?
When cash flow matters more than equity for a defined period — for borrowers with irregular or rising income, or those who plan to invest the difference at a higher return. It is a deliberate trade, not a discount, and it only pays off if you have a clear plan for the principal later.
What happens after the interest-only period ends?
The payment jumps, often sharply, because the full balance must then amortize over the shorter remaining term. You will owe the same principal you started with, now compressed into fewer years, so budget for a meaningfully higher payment when the IO window closes.