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. This results in lower initial payments compared to traditional amortizing mortgages.

2. How Does the Calculator Work?

The calculator uses the interest-only mortgage formula:

Where:

• \( PMT \) — Monthly payment (USD)
• \( PV \) — Loan amount or principal value (USD)
• \( r \) — Annual interest rate (%)

Explanation: The formula converts the annual interest rate to a monthly rate and applies it to the loan amount to calculate the interest-only payment.

3. Importance of Interest-Only Payment Calculation

Details: Calculating interest-only payments helps borrowers understand their initial payment obligations and compare different loan options. It's particularly important for financial planning during the interest-only period.

4. Using the Calculator

Tips: Enter the loan amount in USD and annual interest rate as a percentage. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What happens after the interest-only period ends?
A: The loan converts to a traditional amortizing mortgage, and payments increase significantly as you start paying both principal and interest.

Q2: Are interest-only mortgages risky?
A: They can be, as they may lead to payment shock when the interest-only period ends and don't build equity during that period.

Q3: Who typically uses interest-only mortgages?
A: Often used by investors who plan to sell before the interest-only period ends, or by those who expect significant income growth.

Q4: How does this differ from a traditional mortgage payment?
A: Traditional payments include both principal and interest, gradually paying down the loan balance.

Q5: Are there prepayment penalties with interest-only loans?
A: Some loans may have prepayment penalties - check with your lender for specific terms.