1. What is Interest Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, followed by payments covering both principal and interest. This calculator includes taxes and insurance in the monthly payment calculation.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

• \( P \) — Principal loan amount ($)
• \( R \) — Monthly interest rate (decimal)
• \( Taxes \) — Annual property taxes ($)
• \( Insurance \) — Annual insurance premium ($)
• \( EMI \) — Monthly payment including taxes and insurance ($)

Explanation: The equation calculates the interest portion of the payment plus the monthly allocation of annual taxes and insurance costs.

3. Importance of Accurate Calculation

Details: Accurate monthly payment calculation is crucial for budgeting and financial planning. Including taxes and insurance provides a complete picture of the true monthly housing cost.

4. Using the Calculator

Tips: Enter principal amount in dollars, monthly interest rate as a decimal (e.g., 0.005 for 0.5%), annual taxes and insurance in dollars. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is an interest-only mortgage period?
A: Typically 5-10 years where only interest is paid, after which the loan converts to a traditional amortizing mortgage.

Q2: Are there advantages to interest-only mortgages?
A: Lower initial payments, potentially better cash flow management, and opportunity to invest the difference.

Q3: What are the risks?
A: No equity build-up during interest-only period, potential payment shock when principal payments begin, and risk of property value decline.

Q4: How is monthly interest rate calculated from APR?
A: Divide the annual percentage rate by 12 (months). For example, 6% APR = 0.06/12 = 0.005 monthly rate.

Q5: Should I include PMI in this calculation?
A: If you have private mortgage insurance, it should be included in the insurance component of the calculation.