![]() You, of course, are free to use whatever rate-of-return you like. But considering what the stock market has done since this study, my 7% assumption for deciding whether or not to make extra payments on a loan is conservative.) When you come to this page, you'll find the calculator preloaded with a $260,386 loan/mortgage, and $200 a month is the default prepayment amount.įor the investment rate-of-return, the calculator uses as a default 7.2%, which is the approximate average rate-of-return for the S&P 500 according to this (somewhat dated) analysis. It then calculates the investment gain and subtracts it from the "Total Interest Saved" to arrive at the net gain from the extra payments (the "Interest Saved Less Investment Gain" shown). The calculator uses "Your Investment Rate-of-Return," and calculates the future value of all the projected extra payments. Imagine what it would be like being free of a 30-year mortgage in 20 years! More below Thus when you prepay principal (make extra payments), you are lowering the loan balance used for calculating the interest due.Īs I said, this is a mathematical certainty, and this calculator will show you just how much interest you'll save on any loan, and when the loan will be paid off. The periodic interest amount is calculated using the loan's current balance and multiplying it by the periodic interest rate - the lower the balance, the lower the interest amount due. ![]() It all has to do with the way loans, and mortgages work. The future savings are a mathematical certainty. How is this possible? What sleight of hand is taking place? Specifically, with even a less than average mortgage, by making $200 a month extra payments, the borrower will save over $50,000 assuming a 30-year loan and a 4.25% interest rate. ![]() If the borrower starts making the extra payments early enough, and for an amount that's not exceptionally large, it is possible to save tens of thousands of dollars on a $200,000 mortgage (the average size new mortgage balance as of February 2022, according to CNBC was $453,00). In some cases, usually for longer-term loans such as mortgages, the savings in interest charges can be quite substantial. The answer to both questions depends on the current balance, the loan's interest rate, when you start making extra payments, and the additional payment amount. If I make extra payments, how much will I save? They do it to reduce the loan's interest charges, and to pay off the debt earlier. Why do people pay an "extra" amount when paying back a loan? ![]()
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