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Interest Only Loan Payment Formula:
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Interest only loan payments cover only the interest portion of the loan for a specified period, without reducing the principal balance. This results in lower monthly payments initially but requires larger payments later to repay the principal.
The calculator uses the interest-only payment formula:
Where:
Explanation: The calculation multiplies the principal amount by the monthly interest rate to determine the interest-only payment amount.
Details: Interest-only payments are commonly used in certain mortgage products, business loans, and investment properties where borrowers want lower initial payments with the expectation of higher future income or property appreciation.
Tips: Enter the principal amount in dollars and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be valid (principal > 0, rate between 0-1).
Q1: What's the difference between interest-only and amortizing loans?
A: Interest-only loans only cover interest payments initially, while amortizing loans include both principal and interest payments from the start.
Q2: How long do interest-only periods typically last?
A: Interest-only periods usually range from 5-10 years, after which payments increase significantly to include principal repayment.
Q3: Are interest-only loans risky?
A: They can be riskier as they don't build equity during the interest-only period and may lead to payment shock when the principal repayment begins.
Q4: Who benefits from interest-only loans?
A: Investors, property flippers, or those expecting significant income growth may benefit from the lower initial payments.
Q5: How do I convert annual rate to monthly rate?
A: Divide the annual interest rate by 12 (for monthly payments) and convert to decimal (e.g., 6% annual = 0.06/12 = 0.005 monthly).