What happens when the interest-only period ends?

When the interest-only period ends, your payment increases significantly because you must now pay both principal and interest over the remaining loan term. For example, a 30-year loan with 10-year interest-only period would amortize over the remaining 20 years.

How does an ARM rate adjustment work?

ARM rates adjust based on an index (like SOFR) plus a margin. Rate caps limit how much the rate can change: initial adjustment cap (first adjustment), periodic cap (subsequent adjustments), and lifetime cap (maximum over loan life).

What are the risks of an Interest-Only ARM?

Key risks include payment shock when interest-only period ends, rate increases on adjustable portion, no equity building during interest-only period, and potential negative amortization if payments don't cover interest after rate increases.

Interest-Only ARM Calculator

Calculate your interest-only adjustable rate mortgage payments and see payment changes over time.

Interest-Only ARM Payment Calculator

Understand your payments during interest-only period and after conversion to fully amortizing

Adjustable Rate Mortgage

Loan Details

Loan Amount ($) Total mortgage amount

Loan Term (Years) Total loan duration

ARM Structure

Initial Rate (%) Rate during interest-only period

Interest-Only Period Years paying interest only

ARM Type Fixed period / adjustment frequency

Expected Rate After Adjustment (%) Projected rate after first adjustment

Rate Caps

Initial Adjustment Cap (%) Max rate change at first adjustment

Periodic Cap (%) Max rate change per adjustment

Lifetime Cap (%) Max total rate increase over life

Rate Floor (%) Minimum rate (usually initial rate)

Payment Analysis

Interest-Only Payment

Years 1-7

Fully Amortizing Payment

Years 8-30

Payment Increase

When IO period ends

Total Interest

Over loan life

PHASE 1

Interest-Only Period

Duration 7 years

Interest Rate 6.5%

Monthly Payment $0

Principal Paid $0

Total Interest Paid $0

PHASE 2

Fully Amortizing Period

Duration 23 years

Interest Rate 7.5%

Monthly Payment $0

Principal Paid $0

Total Interest Paid $0

Payment Shock Warning

Monthly Increase

Percentage Increase

Annual Increase

Rate Adjustment Scenarios

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Scenario	Rate	Monthly Payment	vs Initial IO	Total Interest

Total Cost Breakdown

Principal (0%)

IO Interest (0%)

Amort Interest (0%)

Cost Summary

Loan Amount $0

Interest-Only Interest $0

Amortizing Interest $0

                    Total Interest
                    $0
                

                    Total Cost
                    $0
                

IO ARM vs Fixed Rate Comparison

Interest-Only ARM

Total cost over loan life

30-Year Fixed @ 7%

Total cost over loan life

Payment Schedule by Year

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Year	Phase	Rate	Monthly Payment	Annual Payment	Principal Paid	Interest Paid	Balance

Interest-Only Payment Formula

IO Payment = Principal × (Annual Rate / 12)

Understanding Interest-Only ARMs

What is an Interest-Only ARM?

An Interest-Only ARM combines two features: you pay only interest for an initial period (no principal), and the rate adjusts periodically. This results in lower initial payments but significant payment increases later.

How Payment Shock Works

During IO period: Pay only interest (lower payment)
After IO period: Pay principal + interest
Remaining balance amortized over fewer years
Rate may also increase at same time
Double impact: higher principal AND potentially higher rate

Rate Cap Structure

Initial Cap: Max first adjustment (often 2-5%)
Periodic Cap: Max each subsequent adjustment (often 2%)
Lifetime Cap: Max total increase (often 5-6%)
Floor: Minimum rate (often initial rate)

Who Should Consider IO ARMs?

Borrowers expecting income growth
Those planning to sell before IO period ends
Investors maximizing cash flow
Borrowers with irregular income
NOT recommended for long-term homeowners