Monthly mortgage payments are composed of three variables: equity, interest and escrow. When you make a payment, a certain amount of that payment is allocated to each of these variables. Accelerating a mortgage means you opt to pay more than the required amount each month and apply it toward equity. Although this does nothing to reduce the required monthly payment, it will shorten your mortgage term.
1. Contact your lender and get the terms of your loan. You need the monthly mortgage payment without the escrow addition, the interest rate and original loan amount.
2. Multiply the required monthly payment, without escrow, by the number of months in the loan term. For example, a $150,000 loan at 7 percent for 30 years would have a monthly equity plus interest payment of $997.95. Multiplying this value by 360 months (30 years) gives you a total payment of $359,262.
3. Subtract the original loan amount to calculate the amount of interest you pay without acceleration. In the example, this equates to $209,262 in interest. To figure out the interest with acceleration, you need to calculate how long you will pay the accelerated monthly payment.
4. Divide the interest rate by 12 to calculate the monthly interest rate. In the example from the previous steps, this gives you a monthly interest rate of 0.0058333.
5. Multiply this number by the original loan amount. In the example, this gives you 875.
6. Divide 875 by your accelerated monthly equity plus interest payment. This will be the required equity plus interest payment, plus the amount extra you pay toward equity. In the example, if you wanted to contribute $100 more per month, your accelerated equity plus interest payment would be $1,097.95. Dividing by this number gives you 0.79694.
7. Subtract this number from 1. In the example, this leaves 0.20306.
8. Take the natural log of this number. On a business or scientific calculator, enter the number and press "ln." In the example, this gives you -1.594225.
9. Divide this number by the natural log of 1 plus the monthly interest rate. In the example, you would take the natural log of 1.0058333 and divide it into the previous calculation. This gives you -274.097.
10. Multiply this figure by -1 to make it a positive number. In the example, this means your accelerated monthly payment will payoff your loan in approximately 274 months, or a little under 23 years. Armed with that figure, you can figure out the interest on the accelerated loan.
11. Multiply the accelerated monthly payment by the length of the accelerated mortgage. In the example, this gives you a total payment of $300,944.57.
12. Subtract the original loan amount to calculate the interest on the accelerated mortgage. In the example, you would be paying $150,944.57 in interest.
13. Subtract this figure from your original interest total to calculate the amount of interest you save. In the example, paying an extra $100 per month would save you $58,318.78 in interest payments.
Items you will need
- Business or scientific calculator
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