The Mortgage Professor

Interest-Only Versus Fully-Amortizing Mortgage

May 21, 2009

The table below compares a $100,000 mortgage with and without an interest only option for 10 years. It is assumed that the borrower exercises the option every month during the 10 years.

The borrower who makes the larger fully amortizing payment gradually reduces the balance, and has repaid about $16,000 of it by the end of the 10^th year. The borrower who pays interest only does not begin to reduce the balance until year 11.

Required Payments on a $100,000 30-Year Mortgage at 6.25%, With and Without a 10-Year Interest-Only Option

	Fully Amortizing Payment				Interest Only Payment
	Pmt	Interest	Prin.	Balance	Pmt	Interest	Prin.	Balance
Mon	First Year
1	615.72	520.83	94.89	99,905	520.83	520.83	0	100,000
2	615.72	520.34	95.38	99,810	520.83	520.83	0	100,000
3	615.72	519.84	95.88	99,714	520.83	520.83	0	100,000
4	615.72	519.34	96.38	99,617	520.83	520.83	0	100,000
5	615.72	518.84	96.88	99,521	520.83	520.83	0	100,000
6	615.72	518.34	97.38	99,423	520.83	520.83	0	100,000
7	615.72	517.83	97.89	99,325	520.83	520.83	0	100,000
8	615.72	517.32	98.40	99,227	520.83	520.83	0	100,000
9	615.72	516.81	98.91	99,128	520.83	520.83	0	100,000
10	615.72	516.29	99.43	99,029	520.83	520.83	0	100,000
11	615.72	515.77	99.95	98,929	520.83	520.83	0	100,000
12	615.72	515.25	100.47	98,828	520.83	520.83	0	100,000
	Eleventh Year
121	615.72	438.74	176.98	84,060	730.93	520.83	210.10	99,790

At the end of the interest-only period, the payment is increased to $730.93. It is larger than the payment on the loan that was fully-amortizing from the beginning because it must pay off the loan over 20 years rather than 30.

Note that the example assumes that the interest rate is fixed over the entire life of these loans. Most interest-only loans, however, are adjustable rate, which means that the rate is very unlikely to be the same 10 years down the road.

Home

Eleventh Year