When you take out a 30-year mortgage, or mortgage with other term, your bank calculates a monthly payment that contains both the interest you owe on the money you borrowed and some extra that gets applied to what you owe. As you make your payments, you pay more principal and less interest until the loan gradually gets paid off. Paying extra towards principal every month can take years off of the life of your mortgage and get you out of mortgage debt more quickly.
1. Review your loan’s statement to get its initial balance, monthly principal and interest payment and interest rate. You will need this data to calculate the impact of a higher payment.
2. Open a blank spreadsheet.
3. Enter your interest rate in the following format “x%” in cell A1. For example, if your loan has a 5.25 percent interest rate, you would enter “5.25%” in that cell. Omit any quotation marks.
4. Enter the amount you’d like to pay every month in cell A2. You should enter an amount that is equal to or greater than your current monthly payment. For example, if you want to pay $200 extra a month and your payment is $1,380, you’d enter “1580.” If you’d prefer to have the spreadsheet do the math for you, enter your payment and the extra in this format: “=1380+200.”
5. Enter your original loan balance as a negative number in cell A3. For example, if you originally borrowed $250,000, you would enter “-250000” in cell A3.
6. Enter the formula to calculate the length of the loan in cell A4. On Excel or Google Spreadsheet, you would enter “=NPER(A1/12,A2,A3)” while you’d enter “=NPER(A1; A2; A3;)” in OpenOffice.org.
7. Enter “=A4/12” in cell A5 to find out how many years it will take you to pay off your mortgage at the new payment. For example, if the cell reads “22.496,” you will pay off your mortgage in approximately 22-and-a-half years.
8. Change the value in cell A2 to see how a different payment amount will affect how long it takes to pay off your mortgage until you find a payment that meets your monthly cashflow requirements and that will take enough years off of your mortgage.
9. Make your calculated monthly payment every month. When you make the payment, let your lender know that you want the extra applied to your loan’s principal. You may need to call the lender to find out how to accomplish this.
Things You Will Need
- Mortgage loan statement
- If you have a prepayment penalty, your bank may charge you for paying extra principal. Confirm that your loan doesn’t have a prepayment penalty before making extra payments.
All copyright credits by Steve Lander, Demand Media