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Interest-Only Payment Formula:
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An interest-only home equity loan payment covers only the interest charges on the borrowed amount without reducing the principal balance. This results in lower monthly payments during the interest-only period, but the principal remains unchanged.
The calculator uses the interest-only payment formula:
Where:
Explanation: The monthly interest rate is calculated by dividing the annual interest rate by 12 and converting from percentage to decimal form.
Details: Understanding interest-only payments helps borrowers budget for home equity loans or HELOCs, assess affordability, and plan for the transition to principal-plus-interest payments when the interest-only period ends.
Tips: Enter the principal amount in dollars and the annual interest rate as a percentage. The calculator will compute the monthly interest-only payment. Ensure all values are positive and valid.
Q1: What is the advantage of interest-only payments?
A: Lower monthly payments during the interest-only period, which can improve cash flow and affordability for borrowers.
Q2: How long do interest-only periods typically last?
A: Interest-only periods usually range from 5-10 years, after which payments increase to include principal repayment.
Q3: Does the principal balance decrease with interest-only payments?
A: No, the principal balance remains unchanged during the interest-only period since payments cover only interest charges.
Q4: Are interest-only home equity loans risky?
A: They can be riskier than traditional loans because borrowers aren't building equity during the interest-only period and may face payment shock when principal repayment begins.
Q5: Can I make principal payments during the interest-only period?
A: Most lenders allow voluntary principal payments, which can help reduce the overall loan balance and interest costs.