Fixed-Rate vs. Interest-Only Mortgage
Interest-only payments are lower but build no equity. Compare them against a fixed-rate mortgage that pays down principal from day one.
How the fixed-rate vs. interest-only mortgage calculator works
This comparison sets a conventional fixed-rate loan against an interest-only mortgage so you can see the trade between building equity and minimizing early payments. The fixed loan charges a steady payment that covers interest and principal from the start, shrinking the balance month by month.
The interest-only loan charges less at first because no principal is included, but the balance stays flat and equity does not grow from payments. Tracking both over time shows how much the lower interest-only payment costs you in foregone principal and total interest paid.
Worked example: with loan amount of $350,000, interest rate of 6.75% and loan term (years) of 30, the fixed rate vs interest-only mortgage shows lower payment with interest-only of $301.34.
- Fixed payment
- $2,270.09
- Interest-only payment
- $1,968.75
- Monthly difference
- $301.34
- Equity given up
- $51,447
The formula
The fixed loan amortizes: each payment splits between interest on the balance and principal, so the balance falls. The interest-only loan charges balance times the rate with no principal, so the balance holds. Over time the fixed loan pays less interest in total because its balance is steadily declining.
- Both loans use the same principal, rate basis, and term so the contrast reflects structure, not loan size.
- Equity from principal accrues only on the fixed loan; the interest-only balance stays flat during its IO phase.
- The interest-only loan eventually amortizes or balloons, which is when its required payment rises sharply.
- Home-price appreciation, which can build equity independently of payments, is not assumed in either path.
- Taxes, insurance, and any association dues fall outside the principal-and-interest figures compared here.
Results are estimates for educational purposes and are not financial advice. Confirm exact figures with your lender or a licensed advisor.
Questions about the fixed-rate vs. interest-only mortgage
Why does the fixed loan pay less total interest if its payment is higher?
Because its balance shrinks every month. Interest is charged on the outstanding balance, so as principal falls, each month's interest charge falls with it. The interest-only loan keeps its full balance the whole time, accruing interest on the original amount for longer.
The higher fixed payment is buying down the very balance that generates future interest.
When does an interest-only mortgage make more sense than a fixed loan?
It fits borrowers who prioritize cash flow now and have a clear exit, such as selling or refinancing before the interest-only period ends, or who expect to invest the payment difference at a higher return.
It also suits irregular-income earners who will pay principal in lump sums. For long-term owners wanting steady equity, the fixed loan is usually stronger.
Do I build any equity at all with an interest-only mortgage?
Not from your payments during the interest-only period, since none of that money reduces principal. Your only equity gain in that phase comes from your home rising in value, which is not guaranteed.
Once the loan begins amortizing or you make voluntary principal payments, equity from paydown starts to accrue, but that is later and larger than the fixed loan's steady build.
Is the Fixed-Rate vs. Interest-Only Mortgage free to use?
Yes. Every calculator on MortgageLoansCalculator is completely free, with no sign-up, login or paywall. Run as many scenarios as you like.
Fixed-rate or interest-only — which is better?
A fixed-rate loan builds equity from day one with a steady payment; an interest-only loan starts cheaper but builds no equity and jumps later. Unless you have a clear short-term plan, the fixed-rate loan is the safer choice — compare both above.
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