Interest Only Payment Calculator

What is an Interest Only Payment?

An interest-only payment is a type of loan payment where the borrower pays only the interest on the principal balance, without reducing the principal amount. This type of payment structure is typically used in interest-only mortgages or other types of loans for a set period, after which the borrower must start paying both principal and interest.

The Interest Only Payment Formula

The formula for calculating an interest-only payment is:

\[P = L \times \frac{r}{12}\]

Where:

• \(P\) = Monthly payment
• \(L\) = Loan amount (principal)
• \(r\) = Annual interest rate (in decimal form)

Step-by-Step Interest Only Payment Calculation

1. Identify the loan amount (L) and annual interest rate (r).
2. Convert the annual interest rate to decimal form (divide by 100).
3. Divide the annual rate by 12 to get the monthly rate.
4. Multiply the loan amount by the monthly rate.

Example Calculation

Let's calculate the interest-only payment for a loan of $200,000 with an annual interest rate of 5%:

1. \(L = \$200,000\), \(r = 5\% = 0.05\)
2. Monthly rate = \(0.05 \div 12 = 0.004167\)
3. \(P = 200,000 \times 0.004167 = \$833.33\)

Visual Representation

The green portion represents the monthly interest payment ($833.33), and the blue portion represents the remaining principal ($200,000), which remains unchanged with interest-only payments.