1. What is Interest-Only Payment?

Interest-only payment is a loan payment structure where you only pay the interest charges for a specified period, without reducing the principal balance. This is commonly used in home equity loans and HELOCs (Home Equity Lines of Credit) during the initial draw period.

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 (months) and converting from percentage to decimal form.

3. Importance of Interest-Only Payment Calculation

Details: Understanding interest-only payments helps borrowers budget for initial loan costs, compare different loan options, and make informed decisions about home equity financing. It's particularly important for HELOCs where interest-only payments are common during the draw period.

4. Using the Calculator

Tips: Enter the principal amount (loan balance or drawn amount) in dollars, and the annual interest rate as a percentage. The calculator will compute the monthly interest-only payment. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is the advantage of interest-only payments?
A: Interest-only payments provide lower initial monthly payments, which can be beneficial for short-term cash flow management or if you expect higher income in the future.

Q2: How long can I make interest-only payments?
A: Typically 5-10 years for HELOCs, after which the loan converts to fully amortizing payments including both principal and interest.

Q3: Does the principal balance decrease with interest-only payments?
A: No, the principal balance remains unchanged during the interest-only period since you're only paying the interest charges.

Q4: Are interest-only loans risky?
A: They can be riskier than traditional loans because you're not building equity through principal reduction, and payments will increase significantly when the interest-only period ends.

Q5: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments during the interest-only period, which can help reduce your overall loan balance.