Interest Only Payment Formula:
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An interest-only payment is a loan payment option where the borrower pays only the interest for a set period, typically 5-10 years, without reducing the principal balance. This results in lower initial payments but higher payments later when principal repayment begins.
The calculator uses the simple interest formula:
Where:
Explanation: The calculation multiplies the principal amount by the interest rate to determine the periodic interest payment.
Details: Understanding interest-only payments helps borrowers evaluate short-term affordability versus long-term costs, plan cash flow, and compare loan options.
Tips: Enter the principal amount in dollars and the annual interest rate in decimal form (e.g., 5% = 0.05). All values must be positive numbers.
Q1: When are interest-only loans typically used?
A: Common for investment properties, short-term ownership situations, or borrowers expecting significant income growth.
Q2: What happens after the interest-only period ends?
A: Payments increase significantly as principal repayment begins, usually amortized over the remaining loan term.
Q3: Are interest-only payments tax deductible?
A: For investment properties, interest is typically deductible. For primary residences, consult a tax professional as rules vary.
Q4: What are the risks of interest-only loans?
A: Risk of payment shock when principal payments begin, no equity buildup during interest-only period, and potential for negative amortization if payments don't cover all interest.
Q5: How does this differ from a traditional amortizing loan?
A: Traditional loans include principal repayment in every payment, building equity over time, while interest-only loans defer principal repayment.