1. What is Interest Only Construction Loan?

A construction loan with interest-only payments allows borrowers to pay just the interest during the construction phase, deferring principal payments until construction is complete. This helps manage cash flow during the building process.

2. How Does the Calculator Work?

The calculator uses the simple interest formula:

Where:

• \( Balance \) — Current loan balance in dollars
• \( Rate \) — Annual interest rate in decimal form
• 12 — Number of months in a year

Explanation: The formula calculates the monthly interest payment by converting the annual rate to a monthly rate and applying it to the current balance.

3. Importance of Interest Calculation

Details: Accurate interest calculation is crucial for budgeting during construction, understanding cash flow requirements, and planning for the transition to permanent financing.

4. Using the Calculator

Tips: Enter the current loan balance in dollars and the annual interest rate as a decimal (e.g., 0.05 for 5%). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest-only and principal+interest?
A: Interest-only payments cover just the interest charges, while principal+interest payments reduce the loan balance over time.

Q2: How long can I make interest-only payments?
A: Typically during the construction phase only (6-24 months), after which the loan converts to traditional amortizing payments.

Q3: Is the interest rate fixed during construction?
A: It depends on the loan terms - some are fixed, others may be variable based on an index.

Q4: Are there limitations to this calculation?
A: This assumes simple interest calculation. Some loans may use different methods or have additional fees.

Q5: Should I pay principal during construction if possible?
A: While not required, paying principal can reduce total interest costs if your cash flow allows.