Interest Only Loan Calculator

The interest only loan is a relatively modern invention which has transitioned down from the world of commercial real estate. It is a loan in which the borrower is required to make only payments on the interest due on the loan, but not on the principal. It has the benefit of significantly reducing payments, but it also has the drawback that the principal is not being paid down and will need to be refinanced at some point in the future.

An interest only loan calculator works by simply taking the loan amount and the interest rate, multiplying them together to find an annual interest payment, then dividing by twelve for a monthly payment. For instance, a $200,000 loan at 6% interest only would have annual interest due of $12,000 which works out to a payment of $1,000 per month.

A good interest calculator for these loans will also provide a comparison to a traditional 30-year amortizing mortgage where the monthly payment includes interest and principal. If one ran that calculator, it would show that the monthly payment for this type of loan would be $1,199.10, which is approximately 20% higher than the IO loan. It may also project out future balances. If the interest only loan lasted 30 years, the balance at the end of 30 years would be $200,000. The balance of the amortizing loan would be $0.00. In ten years, the interest only loan’s balance would remain unchanged, while the amortizing loan’s balance would be reduced to approximately $167,400.

A loan interest calculator cannot point out he most important aspect of an interest only loan which is that borrowers are trading slightly lower payments for a much longer period of time in which they will be paying interest. Borrowers also take the risk that the interest only loan cannot be refinanced when it comes due and that they will lose the property. These are significant risks, although for some borrowers taking the risk can be the best business decision. Ultimately, this is a matter of choice for every individual borrowing entity. The wisest borrowers will seek the counsel and advice of outside advisors to help them determine exactly what degree of risk is appropriate for them.