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Interest Only Mortgage Formula:
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An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years. During this period, the principal balance remains unchanged, resulting in lower initial payments.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal balance.
Benefits: Lower initial payments, improved cash flow, potential tax benefits (consult a tax professional), and flexibility for those with variable income.
Risks: No equity buildup during interest-only period, potential for payment shock when principal payments begin, and risk of negative amortization if property values decline.
Tips: Enter the principal amount in dollars and the annual interest rate as a percentage. The calculator will compute your monthly interest-only payment.
Q1: How long does the interest-only period typically last?
A: Most interest-only mortgages have an initial period of 5-10 years before converting to fully amortizing payments.
Q2: What happens after the interest-only period ends?
A: The loan converts to a fully amortizing mortgage, which means your payments will increase significantly to cover both principal and interest.
Q3: Are interest-only mortgages suitable for everyone?
A: They're best for borrowers with irregular income, those who expect significant future earnings increases, or investors who plan to sell the property before the interest-only period ends.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments, but check your specific loan terms as some may have prepayment penalties.
Q5: How does this differ from a traditional amortizing mortgage?
A: In a traditional mortgage, each payment covers both interest and principal, gradually reducing the loan balance. With interest-only, you're only paying the interest portion initially.