This interest only loan calculator figures your loan’s monthly interest-only payment. Admittedly, it...show more instructions
What Is Your Loan’s Monthly Interest-Only Payment?
Are you considering an interest-only loan?
It helps to know what your payment will be before you sign on the dotted line.
This Interest Only Loan Calculator figures your payment easily using just two simple variables: the loan principal owed and the annual interest rate. Click “Calculate Interest Only Payment” and your monthly interest payment will display.
Interest-only loans are simple. Read on to better understand how these loans work and how they might affect your finances.
What Is An Interest-Only Loan?
Interest-only loans are loans where the borrower pays only the monthly interest for a set term while the principal balance remains unchanged. There is no amortization of principal during the loan period.
At the conclusion of the interest-only term, borrowers usually have the option to convert to a conventional loan, or pay the balloon (principal owed).
Payments for conventional loans amortize principal by including both principal and interest in every payment. The principal is the face amount of money owed, while interest is the time cost of borrowing.
The monthly payments on interest-only loans are relatively low since you will not be paying any principal during the loan term. However, after the interest-only loan term expires, which is usually 5-10 years, you normally have to start paying the principal and interest. This means you should expect higher monthly payments after the interest-only period.
Are Interest-Only Loans Right For You?
For most people, the interest-only loan is a good option if you do not intend to keep your property for a long period of time. This is also a good option if you are a savvy investor because it can free up available cash to be invested for a potentially higher return.
However, if the extra money is used for basic needs such as food, children’s education, or paying debts then this might not be a good option for a borrower; unless, of course, the borrower is expecting to receive a big amount of money at the end of the interest-only period.
This Interest Only Loan Calculator makes the math easy by figuring the monthly payments for you. If the monthly payment doesn’t fit your budget, it’s a good idea to look for other financing or funding options.
What Are The Risks Involved With Interest-Only Loans?
You should also be aware that there are risks associated with interest-only loans.
For example, interest-only mortgage loans are very risky if the market price of the property falls during the loan period and you want to sell the property. If the sale price of the property is less than the face amount of your mortgage loan you will be “upside-down” – meaning you owe more than your property is worth. This is known as negative equity.
Additionally, the interest rate of an interest-only loan is usually higher than a conventional mortgage loan because lenders consider interest-only loans to be riskier.
It is also possible for the interest rate to vary based on fluctuating market conditions if your particular loan is set up as an adjustable-rate loan. Thus, if the interest rate goes up, your monthly payment also goes up. If you don’t have enough extra cash to cover the additional amount due to the increased interest rate then you will be at risk of failing to make the monthly payments. If you fail to pay your monthly payments over a period of successive months than you could face foreclosure.
When Are Interest-Only Loans Beneficial?
However, interest-only loans can be very beneficial if used in the right situation.
They can offer more value for your money than any other refinancing option if used for a brief period of time. However, if this is the only way you can afford to purchase a home then consider reassessing your needs to find a more affordable options.
The key is to not be overly lured in by the appeal of a lower monthly payment. Be sure to seek professional advice before signing up for an interest only loan. Be smart, think through your options, and make the best financial decision for you and your family.
Related: 5 Rookie Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
Interest Only Loan Calculator Terms & Definitions
- Principal – The face amount of the loan, denoting an original sum invested or lent.
- Interest – Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.
- Interest Rate – The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
- Mortgage Payment – The amount of money usually charged on a monthly basis for a mortgage that normally includes interest and principal.
- Mortgage – A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.
- Loan Term – The number of years that the borrower needs to pay the loan.
- Interest-Only Loan – Loans where the borrower pays only the interest on the principal balance for a set term while the principal balance remains unchanged.
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