How Do I Figure Out An Interest Only Mortgage Payment?

 


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Basics

An interest only payment is one where a a borrower pays only the interest due on a loan.

No payment is made to pay off the principal of the loan. The interest only payment is lower than a regular loan. When only an interest payment is made the loan balance remains the same.

When you purchase a property you build equity on it in two ways:

  • rise in property value
  • paying the loan off
A 30 year loan takes 30 years to pay off. Your equity this way is built up very slowly over time. This is the part you can control.

One the other side is the market value of your property. You do not control this end.

If the property value has increased by 10% in one year, and you have a regular 30 year loan on the property nearly all of your increase in equity has come from the rise in the property. Very little of the equity has been made by paying your mortgage down slightly.

For this reason many real estate buyers and investors choose to have interest only mortgages.

Figuring Out An Interest Only Payment

Your interest only payment is easy to figure out.

Multiply your loan amount by the annual interest rate. This is your total annual interest payment. Divide this number by twelve to get your monthly payment.

For example, a $120,000 loan with a 10% interest only payment has:

  • an annual interest expense of $12,000
  • a monthly interest expense of $1,000
You will notice that the loan term does not factor in here at all. It doesn't matter if the loan term is 5 years or 30 years, since you are paying only the interest on it.

There are many free mortgage calculators available online to help you figure this out.

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