Interest Only Mortgage Calculator

Interest Only Calculator

An interest-only mortgage can provide the most affordable monthly payments for a home. The loan only becomes fully amortizing after the fixed period, so an interest-only mortgage tends to be more expensive than the same fixed rate mortgage. Interest-only mortgages are most suitable for homebuyers intending to sell their home before the interest-only period ends.

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Interest only mortgage
What is an interest-only mortgage?
An interest-only mortgage is a kind of home loan where you only pay the interest charges for some years, before paying down your loan balance. Eventually, the monthly payments will increase to include principal, so that the loan is paid off by the end of the term.
Because no principal payments are made in the first few years, the monthly dues can increase quite a bit once the loan starts amortizing. After the interest-only period , the loan can convert to a fixed rate mortgage or a variable rate mortgage.
Like any other financial product, an interest-only mortgage has some benefits and drawbacks.
Advantages
An interest-only mortgage can provide a number of benefits to homebuyers.
Initially, borrowers are drawn to this type of loan for the affordable monthly payments. A $250,000 mortgage over a 30-year term at 4.5% interest produces interest-only payments of $937 per month. By contrast, opting for fixed payments on the same loan would result in a monthly obligation of $1,267. That’s a difference of 330$.
Due to the lower monthly payments, borrowers could potentially qualify for a larger home and loan amount. Homeowners that are pursuing this option gain the chance to get comfortable with their mortgage payments, before paying more in the future.
The low monthly obligation also gives an individual a chance to invest the difference to build up their savings. If the sav ings ar thate mak sing 7% annual returns, the future value of the deposits becomes $36,400 after seven years.
Beyond that, mortgage interest charges can be tax deductible up to $500,000. Though you may not get credited dollar for dollar, it can be helpful to maximize your tax deductions. Ultimately, interest-only mortgages can have the least initial impact on a person’s budget and cash flow.
As you can see, there are many attractive features to an interest-only mortgage. But, this type of loan also has some drawbacks and can be detrimental to the wrong kind of applicant.
Disadvantages
Under certain circumstances, an interest-only mortgage can be problematic for some homeowners.
Since only the interest is paid for the first years of the mortgage, the loan amount stays the same for many years. For the loan to be paid off by the end of the term, the monthly payments will have to rise significantly to make up for lost time. Using the same example outlined above, a $937 interest-only payment can jump up to $1,455 (or higher) when fully amortizing.
Many borrowers can find it difficult (or impossible) to manage the fully amortizing loan payments. After 30 years, the interest-only mortgage costs an extra $36,072 than the same fixed loan. Any savings from the interest-only period will likely go towards the additional cost of the loan.
Another risk of the interest-only mortgage is the potential of rising interest rates. Your interest-only mortgage might not convert to a fixed mortgage at the same rate. More often than not, interest-only mortgages turn to ARMs.
Even if an individual intends to refinance, future rates could be many points higher than when the loan was administered. Some interest-only mortgages have a penalty for refinancing too soon, so the borrower may end up owing even more money.
Those not disciplined enough to invest their monthly savings (or pay extra towards to principal) can end up living beyond their means. If a borrower’s income doesn’t rise fast enough or the home doesn’t appreciate (or worse, loses value), he or she can get stuck in a challenging situation.
In the next section, we'll review what type of homebuyer would benefit most from an interest-only mortgage. Don't forget to bookmark this calculator and save it to the home screen of your smartphone. If you found this page useful, please promote us on social media by using the share features.
Who should consider an interest-only mortgage?
An interest-only mortgage is a financial tool that is most suited to a particular type of buyer. Individuals that think their time in the home will be short-lived can benefit from low payments until they have to move. This is especially the case when the homeowner is disciplined enough to reinvest their mortgage savings.
Another homeowner that will benefit from an interest-only mortgage is a homeowner purchasing a second property, with the intention to sell their primary residence shortly. An individual that expects property values to increase can hold on to their main home until the interest-only period ends. The proceeds from the sale can then be used to make a lump-sum payment to the existing interest-only mortgage.
Homeowners that intend to refinance after the interest-only period might also consider an interest-only mortgage. However, their income and assets would have to be in order, to negotiate a reasonable rate. Due to fluctuating interest rates and unpredictable home values, this can be risky. If certain factors come into play, it can be very expensive or impossible.
Alternatives to an interest-only loan
An interest-only loan might not be right for everyone. Luckily there are other mortgage products available such as fixed and variable home loans. The best course of action will be highly personal, depending on your financial priorities.
Those looking for the lowest monthly payment would do well to consider an adjustable rate mortgage. Variable loans generally start with fixed payments for 1 to 15 years, at a lower interest rate than a similar fixed loan.
Homebuyers looking to take on less risk would likely benefit from a fixed rate mortgage. You’ll be able to lock in a reasonable rate now, instead of gambling on future interest rates.
Alternatively, applicants can save up more money for their down payment to reduce the loan amount they need. By paying more upfront, the monthly obligation goes down too. If that’s not feasible, then the next consideration is to purchase a less expensive home temporarily. Once some equity is built up, the homeowner can transition to a bigger, better house.
Using the calculator
This calculator is designed to model the payments of an interest-only mortgage. You'll have to include your financing needs, to get an idea of what the loan will cost you. Let’s review this together.
Step 1. On the first line of the calculator, add the loan amount you need to purchase a home. It’s always best to get pre-qualified so that you are shopping within your budget.
Step 2. Using the drop-down menu on line two, select a term length between 5 and 50 years.
Step 3. Next, you can choose the length of the interest-only period. The best interest-only offers are typically between 5 and 7 years.
Step 4. On line four, specify the interest rate on your mortgage. You can use market averages or what you have already been offered.
Step 5. In the next section, you can add any extra payments you'd like to make towards your principal. Begin by selecting the frequency of the prepayments, followed by the amount you want to contribute. If you're making routine advances, you can also specify when you'd like to start them.
Step 6. Lastly, you can choose between a monthly or yearly summary of your payments. You can also come back and switch between report styles without resetting the calculator.
Step 7. Check you your results.
Once the questionnaire is completed, you can view your results in the form of smart prompts, graphs, and tables.