Home
Back
Interest Only Payment Formula:
| From: | To: |
An interest-only loan payment is a type of loan payment where, for a set period, the borrower pays only the interest on the principal balance, with no principal payments. This results in lower initial payments compared to amortizing loans.
The calculator uses the interest-only payment formula:
Where:
Explanation: The formula calculates the monthly interest payment by taking the annual interest (Principal × Rate) and dividing it by 12 months.
Details: Interest-only loans can provide lower initial payments, improved cash flow for investors, and potential tax benefits for investment properties in some jurisdictions.
Tips: Enter the principal amount in dollars and the annual interest rate as a decimal (e.g., 5% = 0.05). Both values must be positive numbers.
Q1: What is an interest-only period?
A: This is a specified period (typically 5-10 years) during which the borrower pays only interest. After this period, payments increase to include both principal and interest.
Q2: Who typically uses interest-only loans?
A: Real estate investors, homeowners expecting future income increases, or those with irregular income streams often use interest-only loans.
Q3: What are the risks of interest-only loans?
A: The main risk is payment shock when the interest-only period ends and payments increase significantly. There's also no equity build-up during the interest-only period.
Q4: Can I make principal payments during the interest-only period?
A: Most loans allow additional principal payments, but check your specific loan terms as some may have prepayment penalties.
Q5: Are interest-only loans good for investment properties?
A: They can be beneficial for investors seeking to maximize cash flow and leverage, but careful financial planning is essential for the transition to full payments.