1. What is Interest Only Payment?

Interest only payment refers to a loan payment structure where the borrower pays only the interest charges for a specified period, without reducing the principal balance. This is commonly used in home equity lines of credit (HELOCs) and certain mortgage products.

2. How Does the Calculator Work?

The calculator uses the interest only payment formula:

Where:

• \( PMT \) — Monthly payment ($/month)
• \( P \) — Principal or drawn balance ($)
• \( r \) — Monthly interest rate (decimal)

Explanation: The monthly interest rate is calculated by dividing the annual interest rate by 12 and converting from percentage to decimal form.

3. Importance of Interest Only Payment Calculation

Details: Understanding interest only payments helps borrowers budget for HELOC costs, compare loan options, and make informed decisions about debt management during the interest-only period.

4. Using the Calculator

Tips: Enter the principal balance (amount drawn from the line of credit) and the annual interest rate. The calculator will compute the monthly interest-only payment.

5. Frequently Asked Questions (FAQ)

Q1: What is the advantage of interest only payments?
A: Lower monthly payments during the interest-only period, providing cash flow flexibility for borrowers.

Q2: How long do interest only periods typically last?
A: HELOC interest-only periods usually last 5-10 years, after which principal payments begin.

Q3: Does the principal balance decrease during interest only payments?
A: No, the principal remains unchanged during the interest-only period unless additional payments are made.

Q4: Are there risks with interest only payments?
A: Yes, when the interest-only period ends, payments increase significantly as principal repayment begins.

Q5: Can I make principal payments during the interest only period?
A: Most HELOCs allow voluntary principal payments during the interest-only period without penalty.