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Interest Only Payment Formula:
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Interest only mortgage payment is a type of mortgage repayment where the borrower pays only the interest on the loan principal for a certain period, and does not pay down any principal. This results in lower monthly payments during the interest-only period.
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: Calculating interest-only payments helps borrowers understand their monthly financial obligations during the interest-only period of their mortgage and plan their budgets accordingly.
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 ≥ 0).
Q1: What is an interest-only mortgage?
A: An interest-only mortgage is a loan where the borrower pays only the interest for a set period, after which they must start paying both principal and interest.
Q2: How is the monthly interest rate calculated from annual rate?
A: Divide the annual interest rate by 12 (number of months) to get the monthly rate. For example, 6% annual = 0.06/12 = 0.005 monthly.
Q3: What are the advantages of interest-only mortgages?
A: Lower initial monthly payments, which can free up cash for other investments or expenses during the interest-only period.
Q4: What are the risks of interest-only mortgages?
A: After the interest-only period ends, payments increase significantly as principal repayment begins. The borrower doesn't build equity during the interest-only period.
Q5: Are interest-only mortgages suitable for everyone?
A: They are typically best for borrowers with irregular income, those who expect significant future income increases, or investors who plan to sell the property before the interest-only period ends.