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Interest Only Mortgage Formula:
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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 which they begin paying both principal and interest. This results in lower initial payments but requires careful financial planning.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates only the interest portion of the mortgage payment, which is the annual interest divided by 12 months.
Details: Calculating interest-only payments helps borrowers understand their initial financial commitment and plan for the eventual increase in payments when the interest-only period ends.
Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers.
Q1: What are the advantages of an interest-only mortgage?
A: Lower initial payments, potential tax benefits on interest payments, and flexibility for those expecting higher future income.
Q2: What are the risks of an interest-only mortgage?
A: Payments increase significantly after the interest-only period ends, no equity build-up during interest-only period, and risk of negative amortization if property values decline.
Q3: Who is best suited for an interest-only mortgage?
A: Borrowers with irregular income (e.g., commission-based), those expecting significant future earnings increases, or investors planning to sell before the interest-only period ends.
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 traditional amortizing mortgage.
Q5: 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 eventual payment increase.