Interest-Only Payment Formula:
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Definition: This calculator determines the monthly payment for an interest-only mortgage, where you pay only the interest for a set period.
Purpose: Helps borrowers understand their initial payments during the interest-only period of their mortgage.
The calculator uses the formula:
Where:
Explanation: The payment is simply the loan amount multiplied by the monthly interest rate.
Details: Understanding interest-only payments helps with budgeting during the initial loan period and comparing loan options.
Tips: Enter the loan amount and annual interest rate. The calculator converts the annual rate to a monthly rate automatically.
Q1: What is an interest-only mortgage?
A: A loan where you pay only the interest for an initial period (typically 5-10 years), after which you pay both principal and interest.
Q2: When are interest-only mortgages used?
A: Often used by investors expecting property appreciation or borrowers with irregular income who need lower initial payments.
Q3: How does this differ from a regular mortgage payment?
A: Regular payments include principal reduction, while interest-only payments don't reduce the loan balance.
Q4: What happens after the interest-only period ends?
A: Payments increase significantly as you begin paying both principal and interest, often through amortization.
Q5: Are there risks with interest-only mortgages?
A: Yes, including payment shock when the interest-only period ends and no equity buildup during that period.