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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 certain period, typically 5-10 years. During this period, the principal balance remains unchanged, resulting in lower monthly payments compared to traditional amortizing mortgages.
The calculator uses the interest-only mortgage formula:
Where:
Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the principal balance.
Details: Understanding interest-only payments helps borrowers assess affordability during the interest-only period and plan for future payment increases when principal repayment begins.
Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers.
Q1: What happens after the interest-only period ends?
A: After the interest-only period, payments increase significantly as you begin paying both principal and interest, often through amortization over the remaining loan term.
Q2: Who typically uses interest-only mortgages?
A: These are often used by investors expecting property appreciation, borrowers with irregular income, or those who need lower initial payments.
Q3: What are the risks of interest-only mortgages?
A: The main risk is payment shock when the interest-only period ends. There's also no equity buildup from principal reduction during this period.
Q4: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments, but check your specific loan terms as some may have prepayment penalties.
Q5: How does this differ from a traditional mortgage?
A: Traditional mortgages include both principal and interest in each payment, gradually reducing the loan balance, while interest-only payments maintain the original principal.