Interest-Only Home Loan Calculator

What is an Interest-Only Home Loan Calculator?

An Interest-Only Home Loan Calculator is a financial tool that helps borrowers estimate their monthly payments on an interest-only mortgage. In an interest-only loan, the borrower only pays the interest on the mortgage for a specified period, typically 5 to 10 years. This calculator helps you understand the financial implications of such a loan structure.

Formula for Interest-Only Home Loan Calculation

The formula for calculating the monthly payment on an interest-only home loan is straightforward:

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

Where:

• P = Monthly Interest-Only Payment
• L = Loan Amount
• r = Annual Interest Rate (in decimal form)

Calculation Steps

1. Convert the annual interest rate to a monthly rate by dividing by 12.
2. Multiply the loan amount by the monthly interest rate.
3. The result is your monthly interest-only payment.

Example

Let's consider a scenario with the following details:

• Loan Amount: $300,000
• Interest Rate: 4.5% per year
• Loan Term: 10 years (interest-only period)

Calculation:

1. Monthly interest rate: 4.5% / 12 = 0.375%
2. Monthly payment: $300,000 × 0.00375 = $1,125

In this example, the borrower would pay $1,125 per month in interest. Over the 10-year interest-only period, they would pay a total of $135,000 in interest without reducing the principal balance.

Note: It's important to understand that with an interest-only loan, you're not building equity in your home unless the property value increases. After the interest-only period ends, your payments will increase significantly as you begin to pay both principal and interest.