This calculator will help you to compare the monthly payment amounts for an interest-only mortgage and a principal-interest mortgage. Also included are optional fields for taxes, insurance, PMI, and association dues.
Interest-Only Or Principal-Interest?
In the realm of popularly available real estate mortgages, home owners will find themselves faced with a choice between two major categories of loan: the interest only loan, and the traditional principal and interest mortgage. While there are distinctive advantages and disadvantages to both methods of paying for a property, your lender may recommend one for your monetary situation and expectations for the life of your loan, or you may be able to make an informed decision from the evidence. A good place to start is by examining the fruit of both possibilities. In other words, calculate the precise financial gains and losses each one has to offer provided with a theoretical scenario, and judge based on this data.
You can compare the monthly payments that you might be making on both an interest only loan and a principal and interest loan in this simple calculator. Of course, there are many other financial variables that will fit into the puzzle of your monthly bill, and these too you can include in your calculations. These include factors such as taxes, insurance, homeowner's association fees, and more. Otherwise, the only required information concerns the original loan: its life time in years, full principal amount and all important interest rate.
Why an Interest Only Loan?
An interest only loan is one in which the borrower spends as long as the first five or ten years paying off the interest primarily, rather than the principal. Once the interest is totally paid off, and only then, does the borrower begin to pay off the balance of the principal. In this regimen, the borrower is let off a little easier with somewhat lower monthly payments since they are putting money only towards the interest at this point. The advantage of this is that the borrower has some extra cash to do something useful with, such as invest in a small business, their child's future, or a new car, while they are just getting started on their mortgage venture. Finally, when the interest is taken care of, the payments transition to reducing the balance of the principal, therefore bringing the borrower ever closer to the termination of the loan.
Interest only mortgages are a good fit for those whose money tends to come and go in waves rather than being consistent, or for people who expect their careers to skyrocket and make them much more money in a few years than they do right now. This type of mortgage is slightly more volatile than the traditional principal and interest combination, but a great option if you are committed to the home you are buying and determined to afford it any way that you can.
This scheme differs from the principal and interest loan which offers the borrower the ability to pay both principal and interest at the same time, albeit in different amounts each month. The borrower begins by paying far more interest than principal and ends by paying far more principal than interest. Although the regular monthly fee is generally consistent from month to month, the ratio of principal to interest changes, declining as the time goes on until the loan is considered fully amortized, or fully paid off.