The Low Payment Now, and the Cliff Later
You're looking at a $500,000 mortgage at 5%, and the interest-only option dangles a payment of just $2,083 a month. The standard 30-year payment on the same loan is $2,684. That's $601 a month back in your pocket, $7,200 a year, and it feels like a gift. Here's the part the low number doesn't show you: in year 11, when the interest-only period ends, your payment jumps to about $3,800. That's not a typo. The payment nearly doubles overnight.
This is the trade at the heart of every interest-only mortgage. For the first 5 to 10 years, you pay only the interest. None of your payment touches the principal, so the $500,000 you borrowed is still $500,000 when the IO period ends. Then the loan re-amortizes the full balance over the remaining years, fewer years, same principal, so each payment has to be much larger.
Walk through the timeline on this $500,000 loan at 5% with a 10-year IO period on a 30-year term:
- Years 1 to 10 (IO): $2,083 per month. Principal owed stays at $500,000.
- Years 11 to 30 (amortizing): roughly $3,800 per month, the full balance now squeezed into 20 years.
- The jump: about $1,700 more per month, an 82% increase, hitting in a single billing cycle.
And the total cost compounds. Because you spend a decade not reducing principal, you pay interest on the full balance the entire time. Over the life of the loan, an interest-only mortgage typically costs tens of thousands more in total interest than a standard amortizing loan, in exchange for that early breathing room. Enter your loan amount, rate, IO period, and term above, and this calculator shows your IO payment, the exact payment after the jump, and how much extra interest the strategy costs, so the cliff is on your screen instead of in your future.