Making additional payments can reduce the total interest paid and greatly reduce the time needed to pay off the mortgage. To see the impact of making extra payments on your mortgage, begin by creating an amortization chart.
Note: These amortization charts and accompanying formulas are based on fixed-rate fixed-payment mortgages. They are not suitable for adjustable-rate mortgages or those with rate caps. Homeowners with these types of mortgages should contact their financial institution for more information.
How to Create an Amortization Chart
Amortization charts document the schedule of repayment required to pay off a mortgage as well as the principal and interest component of each payment. As the principal or loan amount is reduced, the amount of interest owed declines, but the required payment amount remains the same. Therefore, with each payment a slightly larger portion is applied towards the principal, reducing the total interest owed.
When calculated by hand, the Present Value of an Annuity formula is used to create an amortization chart. Additional payments are calculated using the same formula.
Mortgage Payment Formula for a Fixed-Rate Mortgage Amortization Chart
MP= B [ i ( 1 + i ) ^ n] / [ (( 1 + i ) ^ n) - 1]
MP = monthly mortgage payment
B= amount borrowed
i= monthly mortgage rate (annual rate divided by 12)
n = number of months of the mortgage loan
Follow these steps to create your amortization chart the old-fashioned way.
- Convert the annual interest rate to reflect your monthly payments. For example, a mortgage rate of five percent per year with monthly mortgage payments is 0.05/12 = 0.0041666. Therefore i = 0.0041666.
- Use the mortgage balance, length of the amortization and "i" as calculated in Step 1 to calculate the monthly payments. For example, a $200,000 mortgage with a 30 year amortization at five percent interest has monthly payments of: 200,000[0.0041666(1+0.0041666)^360]/[((1+0.0041666)^360)-1] = $1,073.64.
- Calculate the portion of the payment that is interest: $200,000 x 0.0041666 = $833.32.
- Calculate the portion of the payment that goes toward principal: $1,073.64 - $833.32 = $240.32. Therefore, at the beginning of month 2, Principal (P) is $200,000 - 240.32 = $199, 759.68.
- Using the same formula, calculate the principal, interest, and remaining mortgage amount for month 2. $199,759.68 x 0.0041666 = $832.32 to interest and $234.56 to principal.
- Complete the formula for each of the remaining months of the amortization (360 months in total for a 30 year mortgage with monthly payments.) The last payment will be less than the regular mortgage payments.
|Month|| Beginning of Month
|Interest|| Scheduled Principal
| End of Month |
Additional Mortgage Payments and Amortization
Most mortgages allow homeowners to make extra payments without incurring prepayment penalties or other fees. Specify that you want the additional payment applied directly to the principal balance instead of having it applied to the next scheduled payment.
Effect of One Additional Monthly Mortgage Payment
In the example above, the first payment reduces the principal to $199,759.68, because $240.32 of the regularly scheduled payment is applied to the principal. Making an unscheduled additional mortgage payment of $1,073.64 at the beginning of the second month reduces the principal to $198,686.04, because the whole amount is applied to the mortgage balance, not to interest. The interest owed is now $827.85 instead of $832.32.
|Month||Mortgage Balance||Payment||Interest|| Principal
| End of Month |
Effect of Regular Additional Monthly Mortgage Payments
Increasing your regular monthly mortgage payments by even a small amount has a big impact on the amount of interest paid and the time it takes to pay off your mortgage. Paying an additional $50 each month saves $20,778.55 in interest and reduces your amortization by two years and ten months. Adding $250 each month saves $70,381.10 in interest and reduces the amortization by eight years.
|Regular Mortgage Payments||
|Total Years on Mortgage||30||30||30|
|Amount of Mortgage||$200,000||$200,000||$200,000|
|Annual Interest Rate||5.0%||5.0%||5.0%|
|Additional Monthly Payment||0||$50||$250|
|Scheduled Monthly Payment||$1073.64||$1073.64||$1073.64|
|Accelerated Monthly Payment||N/A||$1123.64||$1323.64|
|Total Interest Paid||$186,511.57||$165,733.02||$116,131.47|
|Total Mortgage Savings||$20,778.55||$70,380.10|
|Years Saved on Mortgage||
2 years 10 months
Not everyone wants to do the calculations required to create an amortization chart and the effects of additional mortgage payments. To save time and work, use an online mortgage payoff calculator. These calculators allow users to explore the time and interest savings of a wide variety of early payment options. Some are designed for simple payment calculations while others are able to do more complex calculations.
With most calculators you input the following:
- Term of the loan (total number of years on the mortgage)
- Number of years remaining on the mortgage loan
- Amount of the mortgage loan
- Interest rate
- A choice of options for additional payments such as monthly, annual, or one-time payments of the same or varying amounts
5 Websites with Additional Payments Calculators
Here are five websites providing easy-to-use online mortgage payment calculators or amortization charts.
- HSBC Amortization Schedule Tool
- Interest.com Mortgage Calculator with extra payments option
- Microsoft Office Templates for Downloadable Amortization Charts with Extra Payments
- Mackenzie Gartside & Associates Mortgage Amortization Calculator
Whether you prefer to do the calculations on your own or with an online calculator, creating an amortization chart for your mortgage allows you to see the time and interest required to pay off your mortgage and explore the impact of additional payments.