Extra Payment Mortgage Calculator

There may be many reasons a person wants to make additional payments on the principal of a loan, but the most common reasons seem to be:

• To payoff a home, auto, or consumer loan more quickly.
• To reduce the amount of total interest paid.
• To take advantage of high mortgage interest rates when other savings plans have a lower interest rate.

All of these may be good reasons to make extra payments, but make sure you understand what you are doing, first.

This approach is pretty easy to understand. If you make additional payments, you'd expect the loan to paid sooner. The spreadsheet assumes that the extra payments are made every month.

Each month, your payment consists of both interest and principal. The amount of interest that is paid depends upon the amount of principal still owed (i.e. the current balance). That means that if you pay down the principal, you will end up paying less interest. This is the so-called "interest savings" that is calculated in the worksheet (i.e. the reduction in the interest expense).

It may be weird to think of making extra payments as an "investment", but it turns out that making extra payments is nearly identical to placing the money in a savings plan. If the mortgage interest rate is the same as for the savings plan, then the amount of reduced interest expense from making extra payments is identical to the amount of interest "gained" in the savings plan (assuming both rates are fixed and compound monthly). The main difference is that with a savings plan (or other similar investment), the cash is more readily available.

The bottom line has to do with two questions (which you will have to answer for yourself):

1. What approach provides a better interest rate?
2. Where should the investment be tied up? (Home equity or a savings/investment account?)

What about home appreciation or depreciation? Simply put, this is a completely separate issue. The "interest savings" from extra payments has to do with the mortgage interest rate, not the present value of the home.

What about taxes? I'm not going to answer this one, but remember that the amount of interest paid on a mortgage is usually deductable and the amount of interest gained in a savings/investment account may be taxable.