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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 certain period, not reducing the principal balance. This results in lower initial payments but no equity build-up during the interest-only period.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by multiplying the principal amount by the monthly interest rate.
Details: Understanding interest-only payments helps borrowers evaluate short-term affordability and compare different loan options. It's particularly important for adjustable-rate mortgages or loans with interest-only periods.
Tips: Enter the principal amount in USD and the monthly interest rate as a decimal (e.g., 0.005 for 0.5%). Both values must be positive numbers.
Q1: What's the difference between interest-only and amortizing payments?
A: Interest-only payments cover just the interest, while amortizing payments include both principal and interest, gradually paying down the loan.
Q2: How do I convert APR to monthly rate?
A: Divide the annual percentage rate (APR) by 12 (months). For example, 6% APR = 0.06/12 = 0.005 monthly rate.
Q3: Are interest-only loans a good idea?
A: They can be beneficial for short-term needs or when expecting higher future income, but risky as they don't build equity and may lead to payment shock when the interest-only period ends.
Q4: What happens after the interest-only period?
A: Payments typically increase significantly as they switch to amortizing payments covering both principal and interest.
Q5: Can I pay principal during interest-only period?
A: Most loans allow extra principal payments during the interest-only period, which can reduce future payments.