1. What is an Interest Only Mortgage?

An interest-only mortgage is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years. After this period, payments increase to include both principal and interest, or a balloon payment may be due.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

• \( P \) — Principal loan amount ($)
• \( R \) — Annual interest rate (%)

Explanation: This calculation determines the monthly payment during the interest-only period of the mortgage, which covers only the interest charges without reducing the principal balance.

3. California Mortgage Considerations

Details: California has specific mortgage regulations and higher housing costs than many states. Interest-only mortgages can be attractive in high-cost areas but require careful financial planning for the payment increase after the interest-only period ends.

4. Using the Calculator

Tips: Enter the principal loan amount in dollars and the annual interest rate as a percentage. The calculator will show your monthly interest-only payment. Remember that this payment will increase significantly once the interest-only period ends.

5. Frequently Asked Questions (FAQ)

Q1: What are the advantages of an interest-only mortgage?
A: Lower initial payments, potential tax benefits (consult a tax advisor), and ability to qualify for a larger loan amount in high-cost areas like California.

Q2: What are the risks of interest-only mortgages?
A: Payment shock when the interest-only period ends, no equity buildup during interest-only period, and potential for negative amortization if property values decline.

Q3: Are interest-only mortgages common in California?
A: Yes, they are relatively common in high-cost California markets where buyers need to manage initial monthly payments, though they declined in popularity after the 2008 financial crisis.

Q4: How long do interest-only periods typically last?
A: Most interest-only periods range from 5-10 years, after which the loan converts to a fully amortizing payment or requires a balloon payment.

Q5: Can I pay principal during the interest-only period?
A: Most interest-only mortgages allow extra principal payments, which can help reduce the loan balance before the payment reset.