An interest-only mortgage is a type of mortgage where you only pay the interest on the loan for a certain period. During this period, the principal loan amount remains unchanged.
To calculate the yearly payment:
\[ \text{Yearly Payment} = \text{Loan Amount} \times \text{Annual Interest Rate} \]
To calculate the monthly payment:
\[ \text{Monthly Payment} = \frac{\text{Yearly Payment}}{12} = \frac{\text{Loan Amount} \times \text{Annual Interest Rate}}{12} \]
Imagine you are planning on buying a new house, and for that reason, you need to borrow $350,000. According to the terms of your mortgage, it will be an interest-only loan during the first ten years, with an annual interest rate of 4%.
Yearly Payment Calculation:
\[ \text{Yearly Payment} = \$350,000 \times 0.04 = \$14,000 \]
Monthly Payment Calculation:
\[ \text{Monthly Payment} = \frac{\$14,000}{12} = \$1,166.67 \]
Based on the example terms, you will have to pay $1,166.67 each month for the next ten years. After this period, you will still have a $350,000 debt that has to be paid off in a lump sum or with higher monthly payments.