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Interest Only Loan Formula:
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An interest-only loan is a type of loan where the borrower pays only the interest for a certain period, with the principal amount remaining unchanged. This results in lower initial payments but requires a lump sum payment or refinancing at the end of the interest-only period.
The calculator uses the interest-only loan formula:
Where:
Explanation: The calculator computes the monthly interest payment and generates a complete amortization schedule showing how each payment is allocated.
Details: With interest-only loans, the amortization schedule shows consistent interest payments with no principal reduction during the interest-only period. The principal balance remains constant throughout the term.
Tips: Enter the principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), and the loan term in months. All values must be positive numbers.
Q1: What are the advantages of interest-only loans?
A: Lower initial payments, improved cash flow, and potential tax benefits (consult a tax professional).
Q2: What are the risks of interest-only loans?
A: No equity build-up during interest-only period, potential for payment shock when principal payments begin, and risk of owing more than the property value.
Q3: How is monthly interest rate calculated from annual rate?
A: Monthly rate = Annual rate ÷ 12. For example, 6% annual rate = 0.06 ÷ 12 = 0.005 monthly rate.
Q4: What happens at the end of the interest-only period?
A: The loan typically converts to a fully amortizing loan, requiring much higher payments, or a balloon payment of the entire principal may be due.
Q5: Are interest-only loans suitable for everyone?
A: They are best for borrowers with irregular income, expecting future income increases, or planning to sell the property before the interest-only period ends.