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Interest Only Loan Formula:
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An interest only home loan is a type of mortgage where the borrower only pays the interest portion of the loan for a specified period, rather than paying both principal and interest. This results in lower monthly payments during the interest-only period.
The calculator uses the interest only loan formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual interest rate to a monthly rate and applying it to the principal amount.
Details: Calculating interest-only payments helps borrowers understand their minimum payment obligations during the interest-only period and plan their finances accordingly. It's particularly useful for investment properties or short-term financing strategies.
Tips: Enter the principal loan amount in currency units and the annual interest rate as a percentage. Both values must be valid (principal > 0, rate ≥ 0).
Q1: What happens after the interest-only period ends?
A: After the interest-only period, the loan typically converts to a principal and interest loan, resulting in higher monthly payments.
Q2: Are interest-only loans suitable for everyone?
A: Interest-only loans are best suited for investors, those with irregular income, or borrowers who expect significant future income increases.
Q3: What are the risks of interest-only loans?
A: The main risk is payment shock when the interest-only period ends and payments increase significantly. Also, the principal balance doesn't decrease during the interest-only period.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments during the interest-only period, which can help reduce the loan balance.
Q5: How long do interest-only periods typically last?
A: Interest-only periods typically range from 1-10 years, depending on the lender and loan product.