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Mortgage Interest Only Payment Formula:
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A Mortgage Interest Only Loan is a type of loan where the borrower pays only the interest portion of the loan for a specified period, without reducing the principal balance. This results in lower monthly payments during the interest-only period.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by dividing the annual interest rate by 12 (to get monthly rate) and multiplying by the principal amount.
Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for higher payments when principal repayment begins.
Tips: Enter the principal loan amount in dollars and the annual interest rate as a percentage. Both values must be positive numbers.
Q1: What is the advantage of an interest-only mortgage?
A: Lower monthly payments during the interest-only period, which can help with cash flow management.
Q2: How long does the interest-only period typically last?
A: Interest-only periods usually last 5-10 years, after which principal repayment begins.
Q3: What happens after the interest-only period ends?
A: Payments increase significantly as you begin paying both principal and interest, or the loan may require a balloon payment.
Q4: Are interest-only mortgages risky?
A: They can be riskier than traditional mortgages since the principal doesn't decrease during the interest-only period, and payments increase later.
Q5: Who should consider an interest-only mortgage?
A: Borrowers with irregular income, those expecting future income increases, or investors who plan to sell the property before principal payments begin.