1. What is Interest Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest on the principal balance for a set period, with the principal amount remaining unchanged during that time.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

• \( P \) — Principal amount (loan amount)
• \( r \) — Annual interest rate (in decimal form)

Explanation: The formula calculates the monthly interest payment by taking the annual interest rate, converting it to a monthly rate (dividing by 12), and multiplying by the principal amount.

3. Importance of Interest Only Calculation

Details: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for when principal payments begin. It's crucial for budgeting and financial planning.

4. Using the Calculator

Tips: Enter the principal loan amount and annual interest rate as a percentage. The calculator will compute your monthly interest-only payment.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: After the interest-only period, borrowers must start paying both principal and interest, which will significantly increase monthly payments.

Q2: 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 substantially afterward.

Q3: Who typically uses interest-only mortgages?
A: Often used by investors who plan to sell the property before principal payments begin, or by those expecting significant income increases.

Q4: How long do interest-only periods typically last?
A: Interest-only periods usually range from 5-10 years, after which the loan converts to a traditional amortizing mortgage.

Q5: Can I make principal payments during the interest-only period?
A: Most lenders allow additional principal payments, but check your specific loan terms as some may have prepayment penalties.