Interest Only ARM Calculator
An interest-only ARM keeps payments very low at first by deferring all principal. See that payment and the jump when amortization begins.
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
- $400,000
- Interest-only rate
- 5.75%
- Interest-only period (years)
- 10
- Total term (years)
- 30
- Rate after IO period
- 7%
jumps to $3,101.20 after 10 years
- Interest-only payment$1,916.67
- Payment after IO period$3,101.20
- Balance still owed$400,000
How the interest-only payment changes with loan amount
Holding the other inputs at the example above, here is how the result moves as loan amount changes.
| Loan amount | Interest-only payment | Interest-only payment |
|---|---|---|
| $200,000 | $958.33 | $958.33 |
| $400,000 | $1,916.67 | $1,916.67 |
| $600,000 | $2,875.00 | $2,875.00 |
| $800,000 | $3,833.33 | $3,833.33 |
The math behind it
The interest-only payment is simply the loan balance times the interest-only rate divided by 12 — you pay interest and nothing else, so the balance stays flat through the interest-only period. When that period ends, the calculator re-amortizes the full balance at your post-period rate over the years that remain, producing a higher payment. It charts the flat balance during the IO years and the payment jump afterward.
Assumptions & limits
- The balance does not change during the interest-only period, because payments cover interest only — you build no equity.
- After the IO period, the entire original balance amortizes over the remaining term at the rate you enter, which drives the payment jump.
- The post-period rate is your estimate. As an ARM, the real rate follows an index plus margin, bounded by caps not modeled here.
- Payments are principal and interest (or interest only). Taxes, insurance, and mortgage insurance are excluded.
Source: Freddie Mac PMMS via FRED. Annual averages; latest weekly reading shown.
Common questions
Why does the payment jump so much after the IO period?
Two things happen at once. You stop paying interest only and must start repaying principal, and that full original balance now has fewer years to amortize over. Compressing the whole loan into a shorter window makes the new payment substantially higher than the interest-only one.
Do I build any equity during the interest-only years?
Not from your payments. The balance stays exactly where it started because you are only covering interest. Any equity comes solely from the home appreciating, not from paying down the loan — so if prices fall, you can end the IO period owing as much as you borrowed.
Is an interest-only ARM riskier than a regular interest-only loan?
Yes, because it stacks two risks. The interest-only structure defers principal, and the ARM can reset to a higher rate. If the rate rises just as principal repayment begins, both forces push the payment up together, which can make the jump severe.