Interest Only Mortgage Calculator

What is an Interest Only Mortgage?

An interest-only mortgage is a type of home loan where the borrower only pays the interest on the mortgage for a set period, typically 5 to 10 years. The principal balance does not decrease during this time unless the borrower makes additional payments. After the interest-only period ends, the loan usually converts to a standard mortgage, or the entire balance becomes due.

The Formula for Interest Only Mortgage Payments

The monthly payment for an interest-only mortgage is calculated using this formula:

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

Where:

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

Step-by-Step Calculation

1. Convert the annual interest rate to decimal form: \[r = \frac{\text{Interest Rate}}{100}\]
2. Calculate the monthly interest rate: \[\text{Monthly rate} = \frac{r}{12}\]
3. Apply the formula: \[P = L \times \frac{r}{12}\]

Example Calculation

Let's calculate the monthly payment for an interest-only mortgage with a principal of $300,000 and an annual interest rate of 4% for a 10-year term:

1. \(r = 4\% \div 100 = 0.04\)
2. \(\text{Monthly rate} = 0.04 \div 12 = 0.003333\)
3. \(P = 300,000 \times 0.003333 = 1,000\)

Visual Representation

The green portion represents the monthly payment ($1,000) in relation to 1% of the principal. The red bar represents the principal ($300,000) which remains unchanged throughout the interest-only period.