Interest-Only Loan Part 2: Calculating the Paydown Payment
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The basics on calculating the paydown payment on the amortization part of an interest-only loan.
There are two parts to an interest-only loan. Part one is just interest, and part two is the paydown, or amortization.
You never have to wait to get to the paydown in order to refinance your interest-only loan. Some investors refinance the same interest-only property over and over before ever getting to the paydown part.
But it’s important to know the numbers even if you don’t want to keep an interest-only loan until the paydown. Here are the basics of calculating 30-year and 40-year interest only loans.
Calculating The Paydown
The interest-only portion of an interest-only loan lasts for a set number of years. For example, let’s say ours lasts 10 years.
The paydown period is when the loan starts amortizing – the actual amount borrowed starts going down. However, you’ll still need to pay normal interest along with the principal payment.
With most lenders, you’ll get either a 30-year or 40-year loan. A 30-year interest-only loan would involve 10 years of just interest, plus 20 years of paydown. For a 40-year, you’d have 30 years’ worth of amortization payments.
A 30-year loan’s payments will be higher because you’re paying the same amount off in a shorter period of time.
Calculating a Paydown Payment Example
Let’s break down the difference between a 30-year and 40-year interest-only loan.
30-year loan = 10 years interest, then 20 years of amortization
40-year loan = 10 years interest, then 30 years amortization
You can use an amortization calculator tool to figure your monthly payments for the paydown period.
Let’s look at an example for a $300,000 interest-only loan. The paydown period payments would be:
30-year = 10 years of $2,000/month + 20 years of $2,509/month
40-year = 10 years of $2,000/month + 30 years of $2,201/month
Remember that you’re never locked into paying a full interest-only loan. An interest-only loan may be worth looking into for your property. Especially if you need a product with lower monthly payments while you wait out rising interest rates.
Help with Interest-Only Loans
Have questions about interest-only loans, or calculating your paydown payment? Is there a deal you’d like us to take a look at?
We search hundreds of loans every month – now is a great time of variety in loan products. We’d love to help you find exactly what you need.
Email us at Info@TheCashFlowCompany.com.
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