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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, typically 5-10 years. During this period, the principal balance remains unchanged. After the interest-only period ends, the loan converts to a standard amortizing loan.
The calculator uses the interest only loan formula:
Where:
Explanation: The monthly payment consists only of interest charges. The principal balance remains constant during the interest-only period.
Details: The amortization schedule shows that during the interest-only period, your entire payment goes toward interest. The principal balance does not decrease until the interest-only period ends and principal payments begin.
Tips: Enter the principal amount in dollars, annual interest rate as a percentage, and loan term in years. The calculator will show your monthly payment and generate an amortization schedule.
Q1: What are the advantages of interest only loans?
A: Lower initial payments, better cash flow management, and potential tax benefits for investment properties.
Q2: What are the risks of interest only loans?
A: Higher payments after the interest-only period ends, no equity build-up during interest-only period, and risk of negative amortization if property values decline.
Q3: Who should consider interest only loans?
A: Investors with fluctuating income, those expecting significant future income increases, or borrowers who plan to sell the property before the interest-only period ends.
Q4: How does the amortization schedule change after the interest-only period?
A: After the interest-only period, payments increase significantly as you begin paying both principal and interest to fully amortize the loan over the remaining term.
Q5: Are interest only loans available for all types of properties?
A: Typically available for investment properties and jumbo loans, but availability and terms vary by lender and market conditions.