How to Calculate Paying off a Mortgage Sooner
If you are a homeowner with decades left on your mortgage, you can design a plan to pay off that loan early. Paying off a mortgage early can save you thousands--sometimes tens of thousands--in interest charges. One of the easiest ways to pay off a mortgage early is to use a biweekly payment plan. This is a simple solution, easily arranged and won't hurt your cash flow very much.
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Instructions
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Review your current amortization schedule. This will show you exactly how much you are paying in interest each month, each year and over the entire course of the mortgage. Depending on the size of your mortgage and the term (length), this could be well more than $100,000 in interest. See Resources for an amortization calculator if you cannot find the one included in your loan paperwork.
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Calculate how much extra you will pay if you use a biweekly schedule. This is simple. On a biweekly schedule, you pay one half of a mortgage payment every two weeks. This equates to 26 half-payments or 13 full payments. To calculate how much extra you must pay each month, simply divide one whole mortgage payment by 12 and add that number to your standard monthly payment.
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Enter your own preferred variable. A biweekly schedule will take about seven years of mortgage payments off a 30-year mortgage. However, you can determine the amount you need to pay each month to payoff the loan in a specified time frame. This is called re-amortization.
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Use this formula to calculate the mortgage payment you are calculating: M = P ( J / 1 - ( 1 + J ) ^ -N). Use the following variables: M = Payment; P = Principal Balance; J = Interest Rate (in decimal form; divide your rate by 1200); N = term (length in months); and ^ = Exponent.
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Enter your own variables. For example, if you have a $100,000 mortgage at six percent on a 30-year term, but you wish to calculate for a 20-year term, your equation will look like this: M = 100,000 x ( 0.005 / 1 - ( 1 + 0.005 ) ^ -240. Perform the calculations in the correct order of operations: 1 + 0.005 = 1.005. 1.005 ^ -240 = 0.3021 (use an Internet calculator). 1 - 0.3021 = 0.6979. 0.005 / 0.6979 = 0.00716. 100,000 x 0.00716 = $716.44. The monthly payment required to repay this loan in 20 years is $716.44.
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References
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