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Interest Only Payment Formula:
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Interest only mortgage repayment is a loan structure where the borrower pays only the interest portion of the loan for a specified period, without reducing the principal balance. 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: Understanding interest-only payments helps borrowers plan their finances during the interest-only period and prepare for higher payments when principal repayment begins.
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, interest rate between 0-1).
Q1: What is an interest-only mortgage?
A: An interest-only mortgage allows borrowers to pay only the interest for a set period, typically 5-10 years, before starting to repay the principal.
Q2: What are the advantages of interest-only payments?
A: Lower monthly payments during the interest-only period, which can help with cash flow management and qualify for larger loan amounts.
Q3: What are the risks of interest-only mortgages?
A: The principal balance doesn't decrease during the interest-only period, and payments will increase significantly when principal repayment begins.
Q4: How do I convert annual interest rate to monthly?
A: Divide the annual interest rate by 12. For example, 6% annual rate = 0.06/12 = 0.005 monthly rate.
Q5: Is interest-only mortgage suitable for everyone?
A: No, it's best for borrowers who expect their income to increase or plan to sell the property before the interest-only period ends.