How the payments are calculated
During the interest-only period the monthly payment is balance × annual rate ÷ 12, and the balance does not fall. After it ends, the full balance is repaid over the remaining months with a level payment: P × r ÷ (1 − (1 + r)^−n), where r is the monthly rate and n the months left.
Total interest = interest-only payment × IO months + amortizing payment × remaining months − loan amount. The comparison loan uses the same rate and total term but repays principal from the first month.
Worked example
A 300,000 loan at 6% for 30 years with 10 years interest-only costs 300,000 × 0.06 ÷ 12 = 1,500 a month for 120 months. The payment then rises to 2,149.29 for the remaining 240 months, an increase of 649.29.
Total interest is 1,500 × 120 + 2,149.29 × 240 − 300,000 = about 395,830. A fully amortizing 30-year loan at the same rate pays 1,798.65 a month and about 347,515 in interest, so the interest-only period costs about 48,316 more.
Assumptions
The rate is fixed for the whole term. Many interest-only mortgages are adjustable-rate loans, so the payment after the reset can be higher than shown. Property tax, homeowners insurance and mortgage insurance are not included, and no extra principal payments are made during the interest-only years.