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Interest Only Mortgage Formula:
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Interest only mortgage repayment is a type of mortgage where the borrower pays only the interest on the loan for a set period, without reducing the principal balance. This results in lower monthly payments initially but requires a lump sum payment or refinancing at the end of the term.
The calculator uses the interest only mortgage 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: Understanding interest only payments helps borrowers plan their finances, assess affordability, and make informed decisions about mortgage options and long-term financial strategies.
Tips: Enter the principal amount in currency units and the annual interest rate as a percentage. Both values must be positive numbers to calculate the monthly interest-only payment.
Q1: What is the main advantage of interest only mortgages?
A: The main advantage is lower monthly payments during the interest-only period, which can help with cash flow management.
Q2: What happens at the end of the interest only period?
A: At the end of the term, borrowers must either pay off the principal in full, refinance the loan, or start making payments that include both principal and interest.
Q3: Are interest only mortgages suitable for everyone?
A: They are typically more suitable for borrowers with irregular income, investment properties, or those who expect significant future income increases.
Q4: How does interest only compare to traditional mortgages?
A: Interest only mortgages have lower initial payments but don't build equity in the property during the interest-only period, unlike traditional amortizing mortgages.
Q5: What risks are associated with interest only mortgages?
A: Risks include potential payment shock when the interest-only period ends, property value fluctuations, and the need to have a repayment strategy for the principal amount.