The obvious difference between an Interest Only Loan and a Principal and Interest Loan is that with Interest Only you are not paying down the principal balance of your mortgage. This means you could possibly owe exactly the same amount after your term ends as when you started.
If this is the case, why would you want an Interest Only Loan? For many home owners it provides the flexibility they want when searching for a mortgage; for others it enables them to purchase more house for a lower monthly payment, and, for investors it may enable them to purchase rental properties and maximize their cash flow. Whatever the reason, interest only loans provide an appealing alternative to home buyers.
How would your monthly payment differ with an interest only mortgage versus a principal and interest mortgage? See below.
Principal and Interest Home Loan using a $100,000.00 mortgage:
Mortgage Payment = P [ i(1 + i)n ] / [ (1 + i)n - 1] where Interest (i) equals r/12.
For our $100,000 mortgage at 5% compounded monthly for 15 years, we would first solve for i as: i = 0.05 / 12 = 0.004167 and n as 12 x 15 = 180 monthly payments
Next we would solve for (1 + i)n = (1.004167)180 which yields 2.11383. Now our formula reads Mortgage Payment = P [ i(2.11383)] / [ 2.11383- 1] which simplifies to Mortgage Payment= P [.004167 x 2.11383] / 1.11383 or: Mortgage Payment = $100,000.00 X 0.00791 = $791.81
Versus Interest Only Mortgage:
Mortgage Payment = (Mortgage Amount X Interest Rate) / 12 months which equates to:
Mortgage Payment = (100,000.00 X 5.00%)/12 = $416.67
*It is obvious that an Interest Only Mortgage offers a drastically decreased payment amount on a monthly basis, which may be a great feature for some home buyers. It is important to take into consideration all factors when determining your mortgage requirements.
When choosing the type of mortgage you want, speak with your Mortgage Specialist and discuss what the most important factors in a mortgage are for you. Is it monthly payment amount, the lowest interest rate, the ability to pay off your mortgage without a penalty?
The terms of your mortgage should be chosen based on your unique mortgage needs and we can help you with this. For further information contact your MBN Calgary and Southern Alberta Mortgage Specialists at 1-866-955-9662.
MBN Mortgage
*may vary
