What is an interest only loan?

What is an Interest Only Mortgage?

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An interest-only loan is a mortgage in which a borrower only pays the interest (not the principal) on their loan for a set period of time, usually between 5 and 10 years. Then, the borrower will either begin paying down the principal, make a lump sum payment, or sell the house.

How do you calculate payments on an interest-only loan?

There are 2 steps to calculating your monthly payment on an interest-only loan. They are:

  • Find the total amount of interest you’ll be paying over the course of a year. To do this, take the total loan amount and multiply it by the interest rate.

For example:

$200,000 loan
5.75% interest rate

200,000 X 0.0575 = 11,500

  • Take the annual amount of interest and divide it by 12.

    11,500 / 12 = $958.33

This final amount ($958.33) will be your monthly payment on an interest-only loan.

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