The 4 Main Repayment Methods
Not all loans are repaid the same way. The method you choose can save — or cost — you thousands in interest. Here's how the four most common methods compare.
Calculate Your Loan
Try different repayment methods with our loan calculator:
Method 1: Equal Payment (Amortization)
How it works: You pay the same fixed amount every month. Early payments are mostly interest; later payments are mostly principal.
Example: $200,000 loan at 7% for 30 years
| Year | Monthly Payment | Interest Portion | Principal Portion |
|---|---|---|---|
| 1 | $1,331 | $1,164 (87%) | $167 (13%) |
| 10 | $1,331 | $971 (73%) | $360 (27%) |
| 20 | $1,331 | $609 (46%) | $722 (54%) |
| 30 | $1,331 | $25 (2%) | $1,306 (98%) |
Total paid: $479,017 Total interest: $279,017
Best for: People who want predictable, stable monthly payments. This is the standard mortgage method.
Downside: You pay the most interest overall because the principal balance decreases slowly.
Method 2: Equal Principal
How it works: You pay the same amount of principal every month, plus decreasing interest. Monthly payments start high and decrease over time.
Example: Same $200,000 at 7% for 30 years
| Year | Monthly Payment | Interest Portion | Principal Portion |
|---|---|---|---|
| 1 | $1,722 | $1,167 | $556 |
| 10 | $1,369 | $814 | $556 |
| 20 | $1,017 | $461 | $556 |
| 30 | $659 | $103 | $556 |
Total paid: $410,583 Total interest: $210,583
Savings vs Equal Payment: $68,434 less interest
Best for: People whose income will stay stable or decrease (approaching retirement). Payments get easier over time.
Downside: Higher initial payments — first year is 29% more than Equal Payment method.
Method 3: Interest Only
How it works: You only pay interest for a set period (typically 5-10 years), then start paying principal + interest. Or you pay the full principal as a lump sum at the end.
Example: Same $200,000 at 7%, interest-only for 10 years, then 20-year amortization
| Period | Monthly Payment | What You're Paying |
|---|---|---|
| Years 1-10 | $1,167 | Interest only (principal unchanged) |
| Years 11-30 | $1,550 | Principal + interest |
Total paid: $512,076 Total interest: $312,076
Best for: Real estate investors who plan to sell before the interest-only period ends, or borrowers expecting significantly higher future income.
Downside: You build zero equity during the interest-only period, and total interest is the highest of all methods.
Method 4: Balloon Payment
How it works: Low monthly payments (often interest-only or partially amortized) with one large "balloon" payment at the end.
Example: Same $200,000 at 7%, 5-year term with balloon
| Period | Monthly Payment | End Balloon |
|---|---|---|
| Years 1-5 | $1,167 | $200,000 |
Total paid: $270,000 (payments) + $200,000 (balloon) = $270,020 Total interest: $70,020
Best for: Borrowers who are certain they'll refinance or sell before the balloon date. Common in commercial real estate.
Downside: Enormous risk. If you can't refinance or sell, you owe the entire balloon amount. This is what caused many foreclosures in 2008.
Side-by-Side Comparison
$200,000 loan at 7% for 30 years:
| Method | Monthly (Year 1) | Monthly (Year 20) | Total Interest | Risk |
|---|---|---|---|---|
| Equal Payment | $1,331 | $1,331 | $279,017 | Low |
| Equal Principal | $1,722 | $1,017 | $210,583 | Low |
| Interest Only | $1,167 | $1,550 | $312,076 | Medium |
| Balloon (5yr) | $1,167 | N/A | $70,020* | High |
*Balloon total assumes sale/refinance at year 5
How to Choose
| Your Situation | Best Method |
|---|---|
| Want stable, predictable payments | Equal Payment |
| Can afford higher initial payments | Equal Principal (saves the most) |
| Income will increase significantly | Interest Only (short term) |
| Will sell/refinance within 5 years | Balloon (if you're certain) |
| Just want to minimize total cost | Equal Principal |
| Standard home mortgage | Equal Payment |
| Investment property (short hold) | Interest Only or Balloon |
Extra Strategies to Pay Less Interest
Regardless of method, these strategies reduce your total interest:
1. Make Extra Principal Payments
Even $100/month extra on a $200,000 mortgage at 7% saves $66,000 in interest and pays off 7 years early.
2. Biweekly Payments
Pay half your monthly payment every two weeks. You end up making 13 monthly payments per year instead of 12 — shaving years off the loan.
3. Refinance When Rates Drop
If rates drop 1%+ below your current rate, refinancing could save thousands. But factor in closing costs (2-3% of loan amount).
4. Round Up
Rounding $1,331 to $1,400 costs you $69/month extra but saves $28,000 in interest over the loan's life.
Key Takeaways
- Equal Payment is safest and most common — fixed, predictable monthly cost
- Equal Principal saves the most interest (up to 25% less) but starts with higher payments
- Interest Only is highest-risk for homeowners — you build no equity
- Balloon loans are specialist tools for short-term strategies, not long-term homes
- Extra principal payments, even small ones, dramatically reduce total interest
- Always calculate total cost, not just the monthly payment