How to Calculate Interest Only Mortgages

An interest only mortgage means that you have the option of only making the interest payment each month on a mortgage loan and nothing towards the principal balance. This type of program has a term attached to it which means that the option of paying the interest only will expire at a specific time and then full payments must be made to include payments against the principal balance. Without a set term for the interest only payment option the loan would never be paid off since nothing is going towards the principal balance. Below is the calculation to determine the interest only payment.

Difficulty:

Moderately Easy

Instructions

1. Determine your current interest rate. Interest only mortgage rates may change as often as once a month.

2. Determine your current loan balance.

3. Follow this formula: (Current loan amount * Interest rate) / 12 = Interest only payment for a specific month.

4. Use this example. Assume your current loan balance is $100,000 and your current interest rate is 7.250. You need to move the decimal point over to the left two times on the interest before plugging it into the formula.So, (100,000 * .07250) / 12 months in a year = $604.17.

5. Calculate a $250,000 loan amount at 6.500 interest rate: (250,000 * .0650) / 12 = $1,354.17 for the interest only payment that month.

Tips & Warnings

• There are amortization charts available that will carry out what the interest payments will be for the long term depending on a specific loan balance and using a set or locked in interest rate. This article was aimed at showing you how to calculate the interest payment on any given month at any rate and loan balance.

• Financial calculators will allow you to determine the total amount of interest to be paid in over a specific loan term using a locked interest rate. However when using an adjustable interest rate based on a moving index ,since the interest rate each month is unknown, you will not be able to properly determine total interest payments.