1. What is an 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 interest-only payment formula:

Where:

• \( balance \) — Loan principal amount
• \( r \) — Annual interest rate (in decimal form)

Explanation: The formula converts the annual rate to a monthly rate by dividing by 12, then multiplies by the loan balance to get the monthly interest payment.

3. Understanding Interest-Only Payments

Details: Interest-only payments are lower than amortizing payments initially, but the principal must be repaid eventually, either in a lump sum or through higher payments later.

4. Using the Calculator

Tips: Enter the loan balance in dollars and the annual interest rate as a percentage (e.g., 5.25). The calculator will show the monthly interest-only payment.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: Payments increase to cover both principal and interest, or the loan may require a balloon payment.

Q2: Are interest-only mortgages risky?
A: They can be, as they delay principal repayment and may lead to payment shock when the interest-only period ends.

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

Q4: Does the principal ever decrease with interest-only payments?
A: No, the principal remains the same during the interest-only period unless you make additional principal payments.

Q5: How does this differ from a traditional mortgage payment?
A: Traditional payments include both principal and interest, gradually paying down the loan balance.