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Interest-Only Payment Formula:
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An interest-only mortgage payment is a type of loan payment where you only pay the interest portion for a certain period, without reducing the principal balance. This results in lower initial payments but requires paying the full principal later.
The calculator uses the interest-only payment 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 amount.
Details: Understanding interest-only payments helps borrowers evaluate short-term affordability and plan for future principal payments. It's commonly used in certain mortgage products and investment properties.
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 interest-only payments?
A: Lower initial payments, improved cash flow in the short term, and potential tax benefits in some jurisdictions.
Q2: What are the disadvantages of interest-only payments?
A: The principal balance doesn't decrease during the interest-only period, and payments will significantly increase when principal payments begin.
Q3: How long do interest-only periods typically last?
A: Interest-only periods typically range from 5-10 years, after which the loan converts to a fully amortizing payment.
Q4: Are interest-only mortgages risky?
A: They can be riskier than traditional mortgages as they require discipline to save for the principal payment and depend on property values not declining.
Q5: Who might benefit from an interest-only mortgage?
A: Investors expecting property appreciation, those with irregular income but high earnings potential, or buyers who expect to sell before the interest-only period ends.