1. What is Interest Only Mortgage?

An interest-only mortgage is a loan where the borrower pays only the interest for a set period, typically 5-10 years. During this period, the principal balance remains unchanged.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( P \) — Principal loan amount ($)
• \( R \) — Monthly interest rate (annual rate ÷ 12, as decimal)
• \( \text{Interest} \) — Monthly interest payment ($)

Explanation: The calculation converts the annual rate to a monthly rate by dividing by 12, then multiplies by the principal amount.

3. Importance of Interest Calculation

Details: Understanding your monthly interest payment helps with budgeting and financial planning during the interest-only period of your mortgage.

4. Using the Calculator

Tips: Enter the principal amount in dollars and the annual interest rate as a percentage. The calculator will compute the monthly interest-only payment.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: The loan converts to a principal-and-interest loan, with higher monthly payments that include both principal and interest.

Q2: Are interest-only mortgages risky?
A: They can be, as you're not building equity during the interest-only period and may face payment shock when principal payments begin.

Q3: Who benefits most from interest-only mortgages?
A: Borrowers who expect higher future income or plan to sell the property before principal payments begin.

Q4: How is this different from a traditional mortgage?
A: Traditional mortgages include principal payments from the start, building equity but with higher initial payments.

Q5: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments, but check your loan terms as some may have prepayment penalties.