An interest-only loan is a loan for which the borrower pays only the interest on the capital for a set term, while the capital continues to be outstanding. At the end of the loan term, the borrower has the options of renewing the interest-only loan, repaying the capital, or converting the loan in to a regular principal and interest payment loan. An interest-only loan is a popular method of borrowing money to purchase an asset that is not likely to depreciate much and can be sold at the end of the loan term to repay the capital.
In the United States, a 5 or 10 year interest-only period is the most common. After this period, the principal balance is amortized over the remaining term of the loan. To put it differently, if a borrower had opted for a 30 year mortgage and the first 10 years were interest only, at the end of the first 10 years, the principal amount would be amortized for the remaining period of 20 years. The main benefit is that the monthly repayments for the first 10 years are early substantially lower than the monthly repayments for the next 20 years. This allows a borrower, who expects a substantial increase in income over the term of the loan to borrow a larger amount than they would have otherwise been able to afford.
Interest only loans need calculations to find out the monthly repayment amount that needs to be budgeted. The calculations can get quite confusing when an initial interest only period is followed by a period of principal amortization coupled with interest payment. Interest only loan calculators play an important role in helping a person figure out the payments required to be made during the term of the loan. Several reputed websites such as bankrate.com offer online interactive interest only loan calculators that not only help you figure out how much your mortgage is going to cost but also provide the latest interest rates and advice.
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