An interest-only mortgage is a type of loan where the borrower is required to pay only the interest on the principal balance for a specified period of time. During this period, the principal balance remains unchanged.
This calculator helps you understand the two phases of an interest-only loan:
- Interest-Only Phase: Lower monthly payments covering only the interest.
- Amortization Phase: Higher monthly payments covering both principal and interest to pay off the loan by the end of the term.
Why Choose Interest-Only?
Borrowers often choose interest-only loans to keep their initial monthly payments low. This can be useful for people who expect their income to rise significantly in the future or for real estate investors looking to maximize cash flow. However, it's important to be prepared for the "payment shock" when the interest-only period ends.