1. What is an Interest Only Loan?

An interest only loan is a type of loan where the borrower pays only the interest for a set period, typically 5-10 years. During this period, the principal balance remains unchanged.

2. How Does the Calculator Work?

The calculator uses the interest only loan formula:

Where:

• \( PMT \) — Monthly payment (USD)
• \( PV \) — Loan principal amount (USD)
• \( r \) — Monthly interest rate (decimal)

Explanation: The payment is calculated by multiplying the loan amount by the monthly interest rate.

3. Importance of Interest Only Payments

Details: Understanding interest only payments helps borrowers plan their finances during the interest-only period and prepare for when principal payments begin.

4. Using the Calculator

Tips: Enter loan amount in USD and interest rate as a decimal (e.g., 5% = 0.05). All values must be valid (amount > 0, rate between 0-1).

5. Frequently Asked Questions (FAQ)

Q1: What are the advantages of interest only loans?
A: Lower initial payments, potential tax benefits (for mortgages), and flexibility for those expecting higher future income.

Q2: What happens after the interest only period ends?
A: Payments increase significantly as you begin paying both principal and interest, or the loan may require a balloon payment.

Q3: Who typically uses interest only loans?
A: Real estate investors, borrowers with irregular income, or those who plan to sell the property before the interest-only period ends.

Q4: Are interest only loans risky?
A: They can be, as they may lead to payment shock when the interest-only period ends and don't build equity during that time.

Q5: How do I convert annual rate to monthly?
A: Divide the annual rate by 12 (e.g., 6% annual = 0.06/12 = 0.005 monthly).