Understanding Amortization Tables for Interest Only Loans

Amortization tables are important tools for understanding how loans work They show the breakdown of payments between interest and principal over the life of a loan For interest only loans, the amortization tables look a bit different than for conventional loans. In this article, we’ll take an in-depth look at amortization tables for interest only mortgages and explain how to read and use them.

What is an Interest Only Loan?

With a conventional loan, your monthly payments go towards both the interest and principal balance. This means that each payment lowers the amount you owe.

Interest only loans work differently. For a set period of time, your payments only cover the interest charges and do not reduce the principal balance The interest only period typically ranges from 3-10 years.

After the interest only period, the loan converts to a conventional amortizing loan. Your payments increase to cover both interest and principal.

The main advantage of an interest only loan is the lower monthly payment during the interest only term This helps borrowers afford a more expensive house The tradeoff is you pay more interest over the life of the loan,

How Interest Only Loan Payments Work

During the interest only period, the payment only covers the interest due each month. Looking at a $500,000 loan example:

• Interest only term: 10 years
• Interest rate: 5%
• Monthly payment: $2,083

That $2,083 is simply the interest charge each month ($500,000 x 5% / 12). It does not reduce the $500,000 principal balance.

After 10 years, the loan converts to a 20 year conventional amortizing mortgage. Now the payment increases to $3,332 to cover interest plus principal.

Over 30 years, you would pay over $160,000 more in interest compared to a conventional 30 year loan. The benefit again is the lower payment for 10 years.

Amortization Table Basics

Before looking at interest only loan amortization tables, let’s review the key elements of any amortization table:

• Payment number – Each row represents a payment period, usually monthly. The table shows the breakdown of all payments over the full loan term.

• Payment amount – The scheduled payment amount for that period. For interest only loans, this changes after the interest only term.

• Principal paid – How much of the payment goes towards reducing the loan balance. For interest only loans, this is $0 for the interest only term.

• Interest paid – The interest portion of the payment based on the current balance.

• Total payment – The sum of principal + interest paid for that period. Equals the payment amount.

• Remaining balance – The loan balance after that payment is made and principal is reduced.

These columns show how each payment is allocated between interest and principal. By the final payment, the balance reaches $0.

Interest Only Loan Amortization Tables

Now let’s look at amortization tables for interest only mortgages. The key difference is during the interest only term, the principal paid and remaining balance stay the same:

![Interest Only Loan Amortization Table][]

In this 5 year interest only example:

• Monthly payments are $2,083, which only covers interest.
• The principal balance stays fixed at $500,000.
• In year 6, the payments increase to $3,332 to start paying down principal.

The interest only table highlights the 2 payment phases – interest only and fully amortized. This lets you see how payments and allocation between interest and principal change over the full loan term.

Finding Online Calculators

You can easily create an interest only loan amortization schedule using free online calculators:

• Hugh Calculator
• AmortizationCalc

These tools automatically generate a full amortization table after you input the loan details. Having the table makes it easy to see the impact of different interest only periods, rates, and loan amounts.

When using the calculators:

• Enter the loan amount, interest rate, total term, and interest only term.
• Choose the start date for the first payment.
• Click “Calculate” to generate the table.

These online calculators take seconds to produce a detailed amortization schedule for any interest only loan scenario.

How to Read Interest Only Amortization Tables

When reviewing the amortization table, start by confirming:

• Payment amount during the interest only period
• Length of the interest only term
• Payment amount after interest only period
• Date the payments increase for amortization

Then look at:

• How much interest is paid before principal paydown starts
• The remaining balance when the loan starts fully amortizing
• How many payments are needed after interest only to fully pay off the loan

This helps understand how the interest only feature impacts interest costs and cash flow over the life of the mortgage.

Pros and Cons of Interest Only Loans

Before getting an interest only mortgage, weigh the pros and cons using the information from the amortization table:

Pros

• Lower monthly payments for the interest only term
• Pay less interest early in the loan
• Option to refinance after the interest only period

Cons

• Higher interest paid over full loan term
• Risk of payment shock when loan starts amortizing
• Principal balance remains unchanged during interest only term

Look at the amortization table to quantify these tradeoffs and see if an interest only mortgage aligns with your financial goals.

Key Takeaways

• Interest only loan amortization tables highlight the two payment phases and show payments only covering interest at first.
• After the interest only term ends, payments increase to start fully amortizing and reducing principal.
• Online calculators make it easy to generate interest only loan amortization schedules.
• The amortization table helps you analyze the pros/cons and see the impact of different loan scenarios.

Understanding how to read and use interest only loan amortization tables allows you to make informed decisions about this unique mortgage structure. The amortization schedule clearly shows how interest only loans differ from conventional mortgages.