Use our comprehensive calculator to determine how much you can save on interest and how many years you can shave off your mortgage term by making extra payments.
Mortgage Prepayment Calculator
Mortgage Prepayment Calculator Formula
The calculation relies on the standard amortization formula to find the original payment, and then an iterative loop to determine the new pay-off period and interest paid with the additional principal payment applied each month.
1. Original Monthly Payment (M):
$$ M = P \left[ \frac{r(1+r)^n}{(1+r)^n – 1} \right] $$
Where: P = Principal, r = Monthly Interest Rate (Annual Rate / 1200), n = Total Number of Months (Term in Years × 12)
2. New Term and Savings:
Savings are calculated by running two separate amortization schedules (one with payment M, one with payment M + Extra) and subtracting the total interest paid in the second scenario from the first.
Formula Source: Bankrate Mortgage Calculator Methodology Formula Source: Investopedia Article on PrepaymentVariables Explained
- Principal Loan Amount: The initial amount borrowed from the lender.
- Annual Interest Rate: The nominal yearly rate charged on the loan, expressed as a percentage.
- Original Loan Term (Years): The number of years over which the loan was originally scheduled to be repaid.
- Extra Monthly Payment: The additional amount you plan to pay toward the principal balance each month.
Related Calculators
Explore these other useful financial tools:
- Loan Amortization Schedule Calculator
- Refinance Savings Calculator
- Home Equity Line of Credit (HELOC) Calculator
- Bi-Weekly Payment Calculator
What is Mortgage Prepayment?
Mortgage prepayment involves paying more than the required minimum monthly payment on your home loan. This additional money is specifically applied to the principal balance, rather than future interest. Since mortgage interest is calculated daily or monthly based on the outstanding principal, reducing the principal balance early significantly lowers the total interest accrued over the life of the loan.
By accelerating the principal reduction, you effectively shorten the term of your loan, leading to substantial savings. For a long-term loan like a 30-year mortgage, even small extra payments can make a huge difference, often shaving years off the repayment schedule and saving tens of thousands of dollars in interest.
How to Calculate Mortgage Prepayment Savings (Example)
Follow these steps to understand the mechanics of the calculation:
- Determine the Original Monthly Payment (M): Use the amortization formula with your principal, rate, and original term (e.g., $250,000 at 5.0% for 30 years results in $1,342.05).
- Calculate Original Total Interest: Sum the interest paid over the full 360-month term.
- Simulate New Payment Schedule: Use the New Monthly Payment (M + Extra) and run a month-by-month amortization schedule until the balance hits zero.
- Calculate New Total Interest: Sum the interest paid in the accelerated schedule.
- Find the Savings: Subtract the New Total Interest from the Original Total Interest to determine your total savings.
- Calculate Time Saved: Subtract the new total number of months from the original total months (360).
Frequently Asked Questions (FAQ)
Is it always a good idea to make extra mortgage payments?
Generally, yes, as it saves on interest. However, you should prioritize high-interest debt (like credit cards) first. Also, ensure your emergency fund is fully stocked before committing extra cash to prepayment.
Do I need to notify my lender about extra payments?
It’s crucial to confirm with your lender that the extra funds will be applied directly to the principal and not simply counted as an early payment for the next month. Most modern loan systems allow you to specify this.
What is the difference between principal and interest?
Principal is the original amount of money you borrowed. Interest is the fee charged by the lender for the use of that money. Prepayments attack the principal, thus reducing future interest charges.
Does prepayment affect my credit score?
No, prepaying your mortgage does not directly impact your credit score, as long as you continue to make your minimum required payments on time.