How to Calculate Interest Only Mortgage Repayments

You can borrow more money with an interest-only mortgage.

Many mortgages require you to make payments to pay off the loan in full over a set period of time. However, some lenders offer interest-only mortgages, which are loans that permit borrowers to pay only the interest that would accrue on the mortgage rather than paying down the principal of the loan as well. This allows people to take out a larger amount because their monthly payment is smaller. However, borrowers do not pay off the loan by making interest-only payments and may be in danger if the value of the home falls and they need to refinance.

Instructions

1. Divide the annual interest rate on the interest-only mortgage by 12 to calculate the monthly mortgage payment. For example, if your annual interest rate equals 6.36 percent, you would divide 6.36 by 12 to find the monthly interest rate to be 0.53 percent.

2. Divide the monthly interest rate expressed as a percentage by 100 to calculate the monthly interest rate expressed as a decimal. In this example, you would divide 0.53 percent by 100 to get 0.0053.

3. Multiply the monthly interest rate expressed as a decimal by the amount you owe on your mortgage to calculate the monthly interest-only payment. Concluding the example, if you owe $240,000, you would multiply $240,000 by 0.0053 to find your interest-only payment would be $1,272.

Tips & Warnings

• If you are unsure that you arrived at the correct answer, you may use an online mortgage calculator.

References

• Federal Reserve: Interest-Only Mortgage Payments and Payment-Option ARMs
• Bankrate: Who Should Get an Interest-Only Mortgage?

Resources

• Bankrate: Interest-Only Mortgage Calculator