Faro Labs / Tools / Interest-only calculator
Interest-only calculator
The lower payment during the interest-only window, the higher one waiting on the other side, and exactly what the structure costs you in total interest.
In year 6 the loan re-amortizes over 25 years and the payment rises to $2,827 a $494 jump, 21% higher. The balance is still $400,000, exactly where it started.
How interest-only works
An interest-only payment is the simplest one in lending: you pay exactly the interest that accrued, and nothing else. The balance doesn't move. That's the entire trade: a materially lower monthly obligation in exchange for making zero progress on the debt.
The step-up is the risk
When the interest-only period ends, the full original principal has to be repaid over whatever term remains. A 30-year loan with five years of interest-only doesn't amortize over 30 years afterward; it amortizes over 25, which is why the payment lands higher than a plain amortizing loan would have been from day one. Deals that only work during the interest-only window are deals with a countdown timer.
Where investors use it well
The structure earns its keep when the low payment is buying time for something specific: renovating and re-tenanting a value-add property, bridging to a permanent refinance once the property stabilizes, or holding through a planned sale inside the window. Each of those has an exit that resolves before the step-up. "Rates might drop" is not one of those exits.
Interest-only questions
Do I build any equity during an interest-only period?
Only through appreciation. Your loan balance is identical on the last day of the interest-only period as on the first, so every dollar of equity has to come from the property's value rising. In a flat market you end that period exactly where you started.
Can I pay extra principal during the interest-only period?
Most interest-only loans allow it, and doing so lowers both the accruing interest and the eventual re-amortized payment, since that payment is computed from the balance at the time. Confirm there's no prepayment penalty first: investor and bridge loans carry them more often than owner-occupied ones.
Is a DSCR loan usually interest-only?
Many DSCR lenders offer an interest-only option, and it's popular precisely because the lower payment raises the coverage ratio the loan is underwritten against. That improves the number on paper without changing the property. Worth remembering when a deal only clears DSCR in interest-only form.
Every calculator
See the deal at both payments.
Faro underwrites a real address with your financing terms so you can tell whether the deal survives the step-up.
Estimates for analysis and educational use only: not financial, investment, tax, or legal advice. Verify every number independently before making a purchase decision.