At the beginning of the loan, the majority of your monthly payment goes to interest, with a small amount actually paying off the original debt, or principal. However, most mortgages give you the option to pay additional amounts to the principal balance, which reduces the outstanding balance and shortens the mortgage duration. Even a modest monthly contribution can significantly reduce the number of years before you pay off the mortgage. If you plan to regularly pay additional amounts, you can calculate how much these payments will reduce the mortgage term.
1. Look at your mortgage documents and find out how much the current monthly payment is, minus any escrow amounts. This figure should only include the principal and interest amounts. As an example, if you are borrowing $200,000 with a 30-year fixed interest rate of 6 percent, your monthly principal and interest payment would total $1,199.10. Your actual payment may be larger than this, because money for taxes and insurance is included in the payment, but for the the purposes of this calculation, ignore these fees.
2. Add any extra principal payments you are planning to make. In the example, a modest $100 increase brings you payment up to $1,299.10.
3. Divide your interest rate, in decimal format, by 12 to calculate the monthly interest rate. In the example, 0.06 divided by 12 gives you 0.005.
4. Multiply this figure by the principal balance. In the example, 0.005 times $200,000 gives you $1,000.
5. Subtract your new monthly payment from this figure. In the example, you will have $-299.10.
6. Divide this figure by the new monthly payment. In the example, you would then have -0.230237.
7. Multiply this number by -1. In the example, the negative sign is removed, so you get 0.230237.
8. Take the natural log of this number. On a business or scientific calculator, enter this number and press the "ln" button. Save this number for now. To save it on your calculator, press the "M+" button. In the example, this results in -1.46865.
9. Add 1 to your monthly interest rate. In the example, you would have 1.005.
10. Take the natural log of this figure. In the example, you get 0.0049875.
11. Divide this number into your previous calculation. In the example, this gives you -294.463.
12. Multiply by -1. This will gives you the number of months before your pay off the mortgage. In the example, you have 294.463 months to go.
13. Divide by 12 to calculate the number of years. In the example, your mortgage will be paid off in 24.5 years, or 5.5 years sooner than if you had not made the extra $100 payment every month.
Items you will need
- Business or scientific calculator
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