At the end of the term, the initial loan balance is paid off in
one-lump sum.
Interest Only Loan Payments are very easy to calculate. Since the
borrower is not paying any principal, and there is no amortization, you can use simple math
to calculate your monthly loan payment.
Consider a 10-year, interest-only
loan of $100,000 at 6.25%.
Step 1: Calculate Total Annual Interest
Your total annual interest would be $100,000
(Loan Amount) X .0625 (Interest rate in
Decimals)
= $6,250
Annual Interest Owed
Step 2: Calculate Total Monthly Payment
Divide the annual interest by 12 (number of months in a
year) to determine your monthly payment.
$6,250
(Annual Interest) divided by 12 (number of months)
= Total Monthly Payment of $520.84
That's it !
Otherwise, the
fixed-rate, amortization payment would be $615.72, of which $94.88 is
principal.
The online calculator below determines the
monthly payment amount for a fixed-rate and interest-only loan to
help you comparison the two loan amounts.
| Change the loan amount
to the right and then click Calculate. |
|
|
Back in the twenties,
interest-only loans were the norm. Borrowers typically refinanced at
term, which worked fine so long as the house didn’t lose value and the
borrower didn’t lose their job. But the depression of the thirties
caused a large proportion of these loans to go into foreclosure.
Lenders stopped writing them and have never brought them back. They
want loans that eventually amortize.
Hence, the interest only loans of today are interest
only for a specified period, such as 5 years. At the end of that
period, the payment is raised to the fully amortizing level. In such
case, the new payment will be larger than it would have been if it had
been fully amortizing at the outset.
Interest only mortgages are for
borrowers who want a lower initial payment, and have some confidence
that they will be able to deal with a payment increase in the future.
