How to Calculate the Effect of Paying Extra Toward a Mortgage

One strategy to pay off a home mortgage early is to add additional principal payments to the regular monthly mortgage payment. Paying a home off over the full 30-year term of the typical mortgage results in the homeowner paying several times the initial cost of the home in payments. Paying extra toward a mortgage saves on interest and shortens the term.

Identification

Each payment of a mortgage loan is allocated toward a payment of principal to the loan balance and interest due on the loan. The monthly interest is based on the annual rate and the outstanding loan balance. As the loan balance decreases, the amount of interest in each payment declines and the principal payment increases. Adding extra principal payments accelerates the principal pay down and reduces the interest payments. The result is a loan that is paid off faster than scheduled.

Loan Calculator

A loan calculator determines the payment based on the interest rate, loan amount and term. An advanced calculator will show the allocation of each payment and some versions allow you to enter extra principal amounts to see the effects. Mortgage calculators can be found online at websites like Bankrate.com or a spreadsheet template that performs loan calculations can be used. A free mortgage calculator spreadsheet template from the Vertex 42 website is linked in the Resources.

Function

Enter your mortgage information into the loan calculator and select calculate to show your monthly mortgage payment. Some online calculators will have a button to show the amortization table of the payments. The spreadsheet template will update automatically to show the results of any changes. Review the amortization table to see how much interest and principal is paid with each payment and the total interest that will be paid on the loan if it is paid as scheduled.

Potential

Use the mortgage calculator to see the effects of additional principal payments. For example, a $250,000 loan at 5 percent will have total payments of $433,141 if paid in full. Adding $200 to each monthly payment reduces the total interest paid by $65,700 and shortens the term by 89 months, or more than seven years. The spreadsheet-based calculator allows you to save a record of your additional payments and track your progress to pay off the loan early.

Warning

Extra principal payments are a permanent payment toward the reduction of your mortgage balance. You cannot get the money back or lower future payments to compensate. An early mortgage payoff plan is a long-term plan where you will not see the results for many years. Compare your results with other investment options when considering extra mortgage principal payments.

References

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.