How to Calculate Extra Principal Payments For a Mortgage

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If part of your financial plan centers on paying off your mortgage early, there is a way to calculate the extra payments needed. Depending on your discipline, you can pay off your mortgage 10 or 15 years earlier than your agreed-upon contract. Paying down your principal balance saves you money in interest charges over the life of your mortgage -- and a lot a money at that.

Review the terms and conditions of your mortgage loan. If you have a 30-year mortgage in the amount of $200,000 with an interest rate of 4 percent and monthly payments of $954.83, it means you will pay back, including principal and interest, a total of $343,738.80.

Decide when you want your mortgage paid off. For example, if you decide you want to pay off your mortgage in 15 years, you can insert the new terms into a mortgage calculator to see what additional payments are needed. To pay off your mortgage in 15 years, you will need to make a monthly payment of $1,479.38, which is an additional payment of $524.55 per month. Your total of payments for 15 years will be $266,288.40. You will save $77,450.40 in finance charges.

Find out how finance charges are calculated. Using the example above, you can calculate finance charges for your loan during the first month. Take .04 (interest rate) and divide by 360 (days in a year assuming all months have 30 days), multiply times 31 (the number of days in a billing cycle) and then multiply by the balance of $200,000. The finance charges will be $688.82 for the first month. If the monthly payment is $954.83, your balance will be reduced by $266.01.

Calculate your additional payment for your mortgage. Your additional payment can be whatever you want it to be. Any extra payment you send with your mortgage payment of $954.83 will reduce your principal balance by the entire extra payment. Since your payment is $954.83 after the breakdown of interest and principal is calculated (interest $688.82/ principal payment $266.01), and you send an extra $200, your balance will be reduced by the $200. Whatever you can afford to send -- even if it's $50 -- becomes your additional payment.

Tips & Warnings

  • You can use these steps to calculate additional principal payments on a car loan, personal loan or home equity loan. Just substitute the terms from your loan into the equations to get the results you want.
  • A mortgage calculator is an online tool used to determine various mortgage financing scenarios using mortgage terms.
  • When you make an additional payment, plug the terms and conditions into a mortgage calculator to see how much you will save in finance charges and by how much the term will be reduced.

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