What is an Interest Only Mortgage?
An “Interest Only” Mortgage loan is one in which the buyer makes payments only on the interest that is due on the loan each month for a fixed period of time. After that initial time period is up, the monthly payments increase substantially as the principal payments on the loan come due.
This type of mortgage loan works well for individuals who will either refinance or sell the home once the initial period is over or for buyers who are sure their income will increase substantially over the course of the next few years.
“Interest-only” loans can also be a great match for individuals who derive a substantial portion of their income from annual bonuses or commissions; the extra money one receives as a lump sum may be placed in a short term investment in order to cover the cost of the mortgage increase once it eventually becomes due.
What is a Mortgage Calculator?
Mortgage calculators allow individuals in input data in order to determine how big their monthly payment will eventually be. They are a great tool to help the buyer determine not only how big of a mortgage they can afford but also how fast they want to pay down the principal of the loan.
Mortgage calculators can help prospective buyers determine the following:
- How long a term they want the mortgage to be.
- What the monthly savings might be from refinancing at a lower rate.
- How quickly they can pay down the loan by making extra lump sum or monthly payments.
- What the total payment will be once escrow figures are added in.
Some mortgage calculators include amortization tables, an annual breakdown of the interest and principal payments each month for the entire duration of the loan. Thus, individuals can pinpoint exactly how much equity they are building over time in each scenario they input.
What is the Purpose of an Interest-Only vs. Traditional Mortgage Calculator?
This particular mortgage calculator shows the prospective buyer what their total monthly payment will be both during the interest only period and once the principal payments come due. It then demonstrates what the traditional mortgage payment would be on a loan with the same term and interest rate. Finally, the calculator gives the total interest that would be paid in each scenario.
Here is how the calculator works, using very basic hypothetical figures:
(All Currencies can be used)
The loan amount is $150,000.
The interest rate is 4.25 percent.
The term is 15 years.
Interest-only payments would last for five years.
Interest-only payments for five years: $531.25. The remaining ten years: $1,536.56.
Total interest paid: $66.262.56.
Traditional Payment for the 15 year term: 1,128.42.
Total Interest Paid: $53,115.17.
The “interest-only” vs. traditional mortgage calculator allows prospective buyers to determine for themselves which type of mortgage is most cost effective for them and whether they can eventually afford to make much higher payments on their loan once the initial term is over. It also allows them to see the hidden costs in making interest-only payments early in the term of the loan so that they make adjustments to their payment schedule later on if they so desire.