How to Calculate Extra Principal Payments
Applying extra principal payments to a loan can help pay it off faster and save you money in finance charges. You may be able to reduce the term of the loan significantly. There is a way to calculate extra payments. The good thing about extra principal payments is that you are not obligated to make them and you can make them whenever you want. These payments can be done once a month or even daily if you choose.
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Instructions
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Get a mortgage loan calculator. You will need a loan calculator to determine how much you are going to pay. Take the balance you owe on your mortgage loan and input it into the calculator category that says mortgage amount. The next category allows you to key in the mortgage term. The third category is the interest rate for your loan. The very next section provides the ways that you can add extra payments. Payments can be added right to your mortgage payment.
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Add extra payments using the loan calculator. If you have a mortgage loan in the amount of $165,000 with an interest rate of 7 percent over a term of 30 years, you will be able to determine how your loan will be affected by extra payments. With these terms, your mortgage payment will be $1,097.75. If this loan is allowed to go the full term, you will pay $230,189.68 in finance charges. Add the finance charges to the loan amount of $165,000 to get the total amount of the loan ($395,189.68). If you add $200 to your monthly mortgage payment, the amount of finance charges you will pay is reduced to $136,995.89. Hit the recalculate key to get the figures on the amortization schedule. This schedule gives you the break-down of principal and interest for each payment. The term of the loan is also reduced from 30 years to 20 years.
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Experiment with the calculator. You can add different amounts to the calculator and then hit the recalculate button for the amortization schedule to see how much you will save. The larger your payments, the more money you save in finance charges. The length of the loan is also reduced. When you decide to add extra payments, choose an amount that you can afford and that won't put a strain on your budget. The good thing: You can always reduce the extra principal payment. If you want to pay off your mortgage in 15 instead of 30 years you can experiment to find the amount needed to pay it off in 15 years. You can even pay a lump sum of $5,000 and then run the amortization schedule once again to see how much time and finance charges you shaved from your mortgage.
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Tips & Warnings
The same calculations can be done for your auto loan using an auto loan calculator
