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September 8th, 2016, 06:10 PM   #1
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Formula for interest-only monthly loan payments

For the monthly payment, it's A * ( ((%/12)*(%/12)^m) / (1+((%/12)^m)-1) )

A = loan amount
% = interest rate
m = months

How would I determine the monthly payments if it were an interest-only loan?
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September 9th, 2016, 08:12 AM   #2
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$i = annual\ interest\ rate$

$p = amount\ borrowed$

$n = term\ in\ months,\ n > 1$

$d_k = amount\ due\ at\ end\ of\ month\ k,\ where\ k \in \mathbb N^*\ and\ 1 \le k \le n$

$1 \le k < n \implies d_k = \dfrac{p * i}{12}.$

$k = n \implies d_k = p + \dfrac{p * i}{12}.$

The formulas above may be approximations if (1) fees are added to principal, or (2) interest accrues daily, or (3) if a year is defined as 360 days. There may be other contractual provisions that affect the payment. You need to read the contract very carefully (it may, if the bank has good sense, have an example computation). Alternatively, ask the bank to explain the computation, something a good bank should be more than happy to do.

EDIT: There can also be complications due to fractional months and many complications if there is an early full or partial payoff or if there are staggered draws or if there are late payments.

EDIT 2: In my experience, interest only loans usually arise in one of two circumstances. One is a demand loan, meaning that the bank can demand immediate payment or additional collateral pretty much at will. This happens a lot with loans secured by marketable securities. The other circumstance is on commercial construction loans, where there is no income to pay off the loan during construction, and the construction financing is coupled with the permanent or "take-out" financing when construction is complete.

Last edited by JeffM1; September 9th, 2016 at 08:31 AM.
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