- Interest-only mortgage
- A loan whose payments cover only interest for an initial period, so the balance does not fall. After that period, payments rise to repay the full principal over the remaining term. This calculator compares that structure with a standard fixed-rate loan at the same rate, amount and term.
- Fixed-rate mortgage
- A loan with the same interest rate and the same principal and interest payment for the full term. Each payment covers interest and repays some principal from the first month, so the balance falls steadily. It serves as the baseline in this comparison.
- Interest-only period
- The number of years at the start of the loan during which payments cover interest only. The longer it lasts, the lower the early payments, but the fewer years remain to repay principal, so the later payment is higher and total interest grows. Here the balance at the end of the period equals the original loan amount.
- Interest-only payment
- The monthly payment during the interest-only period: the loan balance times the annual rate, divided by 12. For example, $300,000 at 6.5% is $1,625 a month. It is lower than the fixed-rate payment because none of it repays principal, and it stays the same until the interest-only period ends.
- Payment after interest-only period
- The principal and interest payment once amortization begins, spreading the full balance over the remaining years of the term. Because the same principal must be repaid in less time, it is higher than the fixed-rate payment. The jump is often called payment shock and is the main risk of this loan type.
- Amortization
- Paying off a loan through equal periodic payments that cover interest first and then principal. The fixed-rate loan amortizes from the first payment; the interest-only loan does not amortize until its interest-only period ends, which is why its balance stays at the original amount until then.
- Total cost
- All payments made over the full term, principal plus interest, for each loan. The interest-only loan costs more in total because the balance stays high longer, so interest is charged on more money for more years. The calculator shows the difference as extra interest with interest-only.
- Loan term
- The full number of years over which each loan must be repaid, including any interest-only period. Both loans use the same term here for a fair comparison. On the interest-only loan, the amortizing portion equals the term minus the interest-only period.
