What Is An Interest Only Loan And What Are Its Advantages?
- Date: 2007-07-21 - Word Count: 288
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By taking an interest-only loan, pay only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term you may enter an interest-only mortgage, pay the principal, or convert the loan to a principal and interest payment (or amortized) loan at your option.
A five or ten year interest-only period is typical in Florida. Once this period expires, the principal balance is amortized for the remaining term. As a result, your early payments are substantially lower than the later payments, and you get increased flexibility because you are not forced to make payments towards principal. Another advantage of interest only loans in Florida is that you can borrow more than you can afford under your current financial circumstances.
Calculating interest loans and repayment is simple when compared to an amortizing payment. When calculating for a monthly interest only payment, you need to simply multiply the monthly interest rate by the principal amount. For example, if the principal on a particular interest only loan is $10,000 and the yearly interest rate is 6%, then the monthly interest rate is 6 divided by 12 i.e. 0.5%. To calculate the payment, you need to multiply .5% or .005 X 10,000 that results in a payment of $50.00. This payment is due each month.
Don't think this is a steal! If you apply the same principle to more typical numbers of a mortgage, e.g. $200,000 mortgage at 8% yearly, the interest only payment would be $1,333.33 each month. Then, when you consider the payment on a mortgage with the same numbers amortizing over 30 years is $1,467.53, it doesn't look like the interest only loan is such a great deal because it will never be paid
A five or ten year interest-only period is typical in Florida. Once this period expires, the principal balance is amortized for the remaining term. As a result, your early payments are substantially lower than the later payments, and you get increased flexibility because you are not forced to make payments towards principal. Another advantage of interest only loans in Florida is that you can borrow more than you can afford under your current financial circumstances.
Calculating interest loans and repayment is simple when compared to an amortizing payment. When calculating for a monthly interest only payment, you need to simply multiply the monthly interest rate by the principal amount. For example, if the principal on a particular interest only loan is $10,000 and the yearly interest rate is 6%, then the monthly interest rate is 6 divided by 12 i.e. 0.5%. To calculate the payment, you need to multiply .5% or .005 X 10,000 that results in a payment of $50.00. This payment is due each month.
Don't think this is a steal! If you apply the same principle to more typical numbers of a mortgage, e.g. $200,000 mortgage at 8% yearly, the interest only payment would be $1,333.33 each month. Then, when you consider the payment on a mortgage with the same numbers amortizing over 30 years is $1,467.53, it doesn't look like the interest only loan is such a great deal because it will never be paid
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