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Interest Only Payment Formula:
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An interest only mortgage loan is a type of loan where the borrower pays only the interest for a certain period, typically 5-10 years, before starting to pay both principal and interest. This results in lower initial payments but requires larger payments later.
The calculator uses the interest only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by multiplying the principal amount by the monthly interest rate.
Details: Calculating interest only payments helps borrowers understand their initial financial commitment and plan for future payment increases when the principal repayment period 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, rate between 0-1).
Q1: What is the advantage of an interest only mortgage?
A: Lower initial monthly payments, which can be beneficial for those expecting higher income in the future or investors seeking cash flow flexibility.
Q2: What happens after the interest only period ends?
A: Payments increase significantly as you begin paying both principal and interest, typically resulting in much higher monthly payments.
Q3: Are interest only mortgages risky?
A: They can be riskier than traditional mortgages as they require discipline to save for the higher payments later and depend on property values not declining.
Q4: Who should consider an interest only mortgage?
A: Borrowers with irregular income, investors, or those who plan to sell the property before the interest only period ends.
Q5: How is the monthly interest rate calculated from annual rate?
A: Divide the annual interest rate by 12 (number of months) and convert to decimal (e.g., 6% annual = 0.06/12 = 0.005 monthly).