Interest-Only Grace Period: Lower Payments Now, More Interest Later

A $200,000 mortgage at 7% over 20 years has a payment of $1,550.60. Ask for a 24-month interest-only period and the first two years cost only $1,166.67 a month, which is $383.93 less. Then principal repayment starts, and the payment becomes $1,631.00 for the remaining 18 years. Over the life of the loan you pay $180,297.92 of interest instead of $172,142.92. Those two lighter years cost $8,155.00 more.

An interest-only period, also called a principal grace period, does not make a loan cheaper. It moves the principal repayment later. During those months the balance does not fall at all, so interest keeps running on the full amount.

Loan Calculator shows both payments, the full schedule and what the grace period costs you, for equal payment and equal principal loans.

What should you compare?

An interest-only offer is sold on its first number. Put these side by side before you decide:

• Payment during the interest-only period — interest on the full balance and nothing else.
• Payment after it ends — the principal now has fewer months to be repaid in, so this payment is higher than it would be without a grace period.
• Balance when it ends — with interest-only payments, the balance does not move.
• Total interest — the real price of the lighter months.
• Cash you keep early — how much less you pay during the grace period. Weigh it against the extra interest.

Interest-only period vs full repayment at a glance

All figures are for $200,000 at 7% over 240 months with equal payments.

The grace period keeps $9,214.32 in your pocket over the first two years. After that you pay $80.40 more every month for 18 years. By month 139, more than 11 years in, you have paid more in total than you would have without it, and by the end the difference is $8,155.00.

1. The interest-only months: paying for time

Best for: getting through a short stretch of tight cash, when you are confident the higher payment later will fit your budget.

During the grace period each payment covers only the interest on the full balance:

Interest-only payment = 200,000 × 7% ÷ 12 = $1,166.67
Principal repaid      = $0.00

Every one of these payments is pure interest. After 24 of them you have paid $28,000.08 and still owe exactly $200,000. Without the grace period, the same two years would have cost $37,214.40, but $9,859.81 of that would have gone to principal, leaving a balance of $190,140.19.

In the Yearly view of the schedule, years 1 and 2 each show $14,000.04 paid and no principal repaid. That is the clearest sign that the loan has not moved.

2. When principal starts: a bigger payment over fewer months

Best for: budgeting for the years after the grace period.

When the interest-only months end, Loan Calculator spreads the full balance over the months that are left, at the same rate:

Balance after month 24 = $200,000.00
Remaining term         = 240 − 24 = 216 months
Rate                   = 7% ÷ 12
Payment from month 25  = $1,631.00

This is the same payment as an 18-year loan of $200,000. In month 25 the interest is still $1,166.67, and $464.33 goes to principal. The interest-only months count toward the term you enter, so the end date does not move. The principal simply has fewer months to be repaid in, which is why the payment is higher.

The longer the interest-only period, the higher the later payment and the bigger the interest bill:

In this example, each year of interest-only payments adds a little over $4,000 of interest.

3. Interest-only months with equal principal

Best for: loans repaid with equal principal, where the grace period costs more.

With Equal principal and no grace period, the first payment is $2,000.00 and it falls every month, with total interest of $140,583.90. With 24 interest-only months you pay $1,166.67 for two years. In month 25 the payment jumps to $2,092.60: $1,166.67 of interest plus $925.93 of principal, which is $200,000 ÷ 216. From there it falls to $930.45 in the last month.

Total interest rises to $154,582.89, which is $13,998.99 more. That is much more than the $8,155.00 the same grace period adds with equal payments. Equal principal normally cuts the balance fastest at the start, so pausing the principal takes away more of its advantage. The equal payment vs equal principal guide compares the two methods in full.

4. What if the rate rises?

Best for: floating-rate loans that start with interest-only months.

The If interest rates rise card keeps the interest-only months and recalculates the loan at higher rates. Its note says: "The same loan recalculated at +1, +2 and +3 percentage points. Illustration only, not a forecast."

The higher rate applies to the whole loan, so the interest-only payment rises too: $1,333.33 at 8% and $1,666.67 at 10%. The card shows shortened values, so $1,749.93 appears as "1.75K". At 7% the highest payment is the final one, $1,632.84, because the last month settles the rounding of all earlier months. The regular payment is $1,631.00.

5. How to add an interest-only period in Loan Calculator

Best for: checking an offer before you sign.

1. Enter the Loan amount, the Annual interest rate (%/year) and the Term.
2. Under Interest method, choose Equal payment or Equal principal. The interest-only field is hidden for Flat rate.
3. Open Advanced options and enter 24 in Interest-only period (months, optional). The period must be shorter than the loan; otherwise the app shows "The interest-only period must be shorter than the term".
4. Tap Calculate. The large number at the top is the payment for month 1, here the interest-only $1,166.67. The note below it reads "First 24 months are interest-only; principal repayment starts at month 25."
5. Open Amortization schedule to see row 25 and the $1,631.00 payment. In the Yearly view, year 3 jumps to $19,572.00. The amortization schedule guide explains each column.

The Interest methods compared card compares the three methods without the interest-only period, so its figures match a loan with no grace. To compare methods with the grace period kept, switch between Equal payment and Equal principal on the schedule screen.

Should you take an interest-only period?

FAQ

Does an interest-only period make my loan longer?

No. The interest-only months count toward the term you enter. A 240-month loan with 24 interest-only months repays all of the principal in the remaining 216 months, which is why the payment afterwards is higher.

Why do I pay more interest in total?

Because the balance stays at the full amount for longer. Interest is charged on the balance, so a balance that starts falling later means more interest: $8,155.00 more in our equal payment example and $13,998.99 more with equal principal.

Why does the main result show the lower payment?

The large number shows the payment for month 1, which during an interest-only period is interest only. The note under it tells you the month principal repayment starts, and the schedule shows the payment from that month on.

Can I add an interest-only period to a flat-rate loan?

No. The field is hidden when Flat rate is selected, because a flat-rate loan fixes the principal and interest of every month from the start. Choose Equal payment or Equal principal instead.

Is an interest-only period ever cheaper?

Not in interest. At the same rate it always adds interest, because the balance falls later. What it gives you is lower payments early on, $9,214.32 less over the first two years in our example. Whether that is worth the extra interest depends on your own cash flow.