Interest Only Mortgage Calculator
This interest-only mortgage calculator compares side-by-side the monthly payment for an interest-only mortgage to a conventional principal and interest mortgage. You can include taxes, insurance, PMI, and association dues to get a complete picture of the two mortgage payments.
Before you are tempted by the lower cost of an interest-only mortgage make sure you consider the risks. Rates on interest-only loans can change frequently while others are fixed for a 10-year period so read the fine print. Also, beware of balloon payments and/or negative amortization on some loans.
Interest Only Loan
An Interest Rate is the amount a borrower pays for utilizing money he borrowed. Generally, an interest is calculated as a percentage of money borrowed over a period of one year.
Traditionally, for a home mortgage your monthly repayment will be allocated between the principal and interest. Your monthly repayment will be calculated in such a way that your principal reduces over time and your principal amount will be paid off at the end of your loan term. But for an interest only loan, you are allowed to pay only the interest accrued on the loan during the month for a fixed term. The term for interest only loan is usually limited for 5-10 years. This will allow you to free up some cash so you can divert it to other investments. But remember, by just paying the interest obviously your principal balance will not reduce since you are only paying the interest of your loan. You still need to pay the principal at the end of your interest only loan term.
Before you apply for an interest only loan, you must understand that it is not a mortgage type. Interest only loan is just an option for borrowers that can be attached to any home mortgage loan. The above Interest Only Loan Calculator will help you calculate how much monthly interest should be paid monthly instead of paying both part of both interest and principal every month. All you need to know is the principal amount, annual interest rate and the loan term for you to get accurate results.
Considering An Interest Only Loan
Paying only the interest for a certain period of time is good for people who has low income and anticipates higher income in the coming years. This option will give them the time and flexibility to allocate payments for the principal in the coming years.
The interest only loan is also an advantage for those who have unstable source of income, such as people who rely on bonuses on commissions. One of the best feature of an interest only loan is that you can pay the minimum payments regularly but you are also allowed extra payments if you choose to. If you have extra disposable income, you can just add this to your regular payments and it will be automatically allocated as payment to your principal loan without incurring any penalty. This method will give you a chance to slowly reduce your principal, which in effect will reduce your monthly amortization once the interest only loan is over.
An interest only loan is also a good idea if you plan not to hold your home for a longer time. The key here is you just need to choose a property that appreciates fast so you won’t be losing any money once you sell the property and pay off the mortgage loan. Most property investors who used this strategy got rich quickly. If you plan to do this, be sure to make a careful research and do your calculations before diving into this option.
If you are an investment savvy, an interest only loan is also an advantage for you. You can take the amount saved from your reduced mortgage payments and invest the money into a something with a high return.
If you also have other debts to pay such as credit cards, you can divert your extra income to pay your debts and make extra payments later to your interest only loan once you have paid off your debts.
There are many ways where an interest only loan can work to your advantage. An interest only loan can work best if you have a handful of skills in money management. It also requires a lot of discipline and focus so that you won’t be tempted to spend your extra income for unnecessary things. Do your homework, shop around for the lowest rate, do some calculations before making any decision. Seek an advice from your financial advisor if there are some areas that you are unsure of and find out if an interest only loan option is right for you.
Interest Only Loan Terms And Definitions
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