Why do people pay an "extra" amount when paying back a loan?

They do it to reduce the loan's interest charges, and to pay off the debt earlier.

If I make extra payments, how much will I save?

When will the loan be paid off?

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.

In some cases, usually for longer-term loans such as mortgages, the savings in interest charges can be quite substantial. **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 2017, according to the Consumer Financial Protection Bureau was $260,386).

Specifically, with an 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.

**How is this possible? What sleight of hand is taking place?**

There's no sleight of hand. The future savings are a mathematical certainty. It all has to do with the way loans, and mortgages work. 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.

Thus when you prepay principal (make extra payments), you are lowering the loan balance used for calculating the interest due.

As 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.

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**Sounds pretty good, right?**

Of course it does!

But, what if I told you, **"How much will I save if I make extra principal payments?"**, isn't the question you should be asking?

## "What If I Invested the Money Rather than Make Extra Payments?"

Ahh, that's the more important question!

Rather than reducing interest costs via prepaying principal, what if you saved and invested the money? Would you be further ahead?

That's that critical question to be asking.

If you have $200 and you use it to make a prepayment toward a loan, you can't also use the same $200 for investing. Economists say, not being able to invest is a *foregone opportunity*. The opportunity to do something else with that same $200 won't come back. The chance is gone.

### How then do you know which is the better decision?

Use this calculator!

The calculator uses "Your Investment Rate-of-Return," and calculates the future value of all the projected extra payments. 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).

Let's look at an example.

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.

For 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. (Dated, yes. 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.)

You, of course, are free to use whatever rate-of-return you like.

Using these defaults, here are the results:

$52,829 in interest savings and the mortgage that would have usually taken 360 payments to pay off, will be paid off after 276 payments.

But, here's the real story.

If the borrower takes the $200 a month and invests it, after the 276 months, their investment GAIN will be $81,238! (Total value of the investment account will be $55,000 in extra payments invested plus the $81,238 gain equals $136,238.)

Now it should be apparent that while a $52,000 savings is terrific, an $81,000 gain is better.

Just how much better?

$28,409 better, as the final result "Interest Saved less Investment Gain" ($52,929 - $81,239) shows you.

If, after plugging in your numbers, you get a negative result too, then **YOU SHOULD CONSIDER NOT MAKING EXTRA PAYMENTS!**. You'll, at least hypothetically make more money from your investments than you save in interest charges.

## Want to confirm the results?

Then make sure you click on the "Supporting Schedules" button. There you'll find all the supporting number that went into the above analysis. There's a detailed **amortization schedule showing the periodic payment and interest charges as well as the extra payments** coming off the principal balance.

After the loan payment schedule, you'll find a future value or investment schedule. This schedule documents the capital gain from the invested extra payments.

When might you want to continue to make extra principal payments even when the calculator indicates investing might be the more prudent course to follow?

**There are at least two reasons I can think of when you might not want to invest the prepayment funds.**

I can express one reason with a single word - Risk!

Remember when I was discussing why making prepaid principal payments saves the borrower money, I used the phrase "mathematical certainty?" If the borrower makes the extra payments as anticipated, then the interest savings is a sure thing. The lender can only charge the periodic interest on the outstanding balance of the loan.

But, if you invest, and even if you invest per the anticipated schedule, for the full amount and on the scheduled day, the return on the investment is likely not to be guaranteed (though true, some investment instruments might offer a guaranteed profit). In that case, at the end of the term, when the loan would have been paid off, you might not have the capital gains that you had anticipated. Of course, you might also have a more significant gain than what you had anticipated.

That's the risk.

The second reason why you might not want to invest is that you want to live debt free. I understand how when someone takes out a 30-year mortgage, they might dream of living without any mortgage debt in say 20 years. I get that. The fact is, that's how I felt, and that's what I did - but I did it before I created this calculator!

But consider this - **it is possible to be both free of debt early and implement an investment strategy for your funds rather than a principal prepayment strategy.** They are not mutually exclusive!

**Let me walk you through this, step-by-step:**

- Look at our example again - the one the calculator preloads when you first come to this page (click on your browser's refresh button if you want it back). At the time of this writing, the analysis shows the final payment scheduled for March 1, 2042. Make a note - that's the debt-free date with extra payments.
- Now set the extra payments to 0 and look at the schedule. This is the schedule without any additional payments. Find the balance as of the debt-free date. Again, as of this writing (these illustrations are time sensitive), the balance will be $92,929.
- Now, one more time, reenter the extra $200 payment amount and recheck the investment schedule located after the loan schedule. (The calculator prepares an investment schedule only if you have entered an extra payment amount AND if the option "Include the Investment Schedule?:" is set to "Yes.")
- As shown, when making prepaid principal payments, the loan is paid off in 276 payments - or 23 years.
- On March 1, 2042, the balance in the investment account will be $136,238.
**You can easily pay off the mortgage using the funds in the investment account, live debt free as of the date planned, and still have nearly $40,000 remaining!**

### Of course, there is a rub.

This analysis overlooks the impact of taxes. If you live in the US, all or part of the interest may be deductible from your income taxes (though after the 2017 tax law changes, this is not as much of a certainty as it had been in the past). One the investment side, income taxes will frequently have to be paid on any investment gain, thus reducing the illustrated gain.

But even taxes on the gain are not a foregone conclusion. If you were to invest in tax-free bonds, then there is no tax on the income (but the illustration probably won't be as favorable). Or if you invest and don't sell along the way, the gain will compound tax-free. You'll only pay income taxes on the gain when you sell. And generally, income taxes on long term capital gains are very favorable to investors.

No doubt these points about taxes are something you need to consider. If I were to program the various tax considerations as options for this calculator, I think it would leave users very frustrated - not to mention me!

## The Calculator's Features

Of course, your situation is likely different than this hypothetical example. So you'll want to use this Extra Payment Calculator to see just what you can save and when your loans will be paid off.

Let me take a few moments to go over some the other features this calculator supports.

If you don't plan to make extra payments monthly, that's okay. The calculator will let you make additional payments using any one of 11 payment frequencies set independently from when the scheduled payments are due.

For example, do you get an annual bonus? Do you want to use that bonus to prepay principal? This calculator will still calculate your saving under such a scenario. You can easily set it to make one or two extra payments a year.

Or do you want to make a one-time extra payment? That's no problem either. The calculator supports making a single extra payment on any date during the term of the loan. Perhaps you've received a one-time inheritance, and you are considering using it to reduce your loan's principal balance. The Extra Payment Calculator will tell you the amount of interest you'll save and when the pay off will be.

Don't forget to check out the amortization schedule for all the details.

(Perhaps I should also point out that the loan itself does not need to follow a monthly payment schedule. The last option on the Extra Payment tab allows the user to select any payment frequency.)

## This Calculator is Not Just for New Loans.

Up until now, I've been implying that the calculator is only for analyzing new loans. That's not the case. Perhaps you've been making loan payments for a few years, and you've recently received a raise. If you want to see the impact of making extra payments on an existing loan then there are no unknowns for the calculator to calculate (other than the effect of making the prepaid principal payments of course), so enter the following for the first four inputs:

- The loan's balance as of the last payment due date.
- The number of payments remaining.
- The loan's interest rate.
- The regular payment amount.

The calculator will use the terms of your loan for the analysis.

There is also **one other setting to be aware of**. On the "Extra Payments/Investment Rate" tab, please see "Is a Regular Payment Due Today?:" This setting impacts the analysis. It is set to "No" by default. However, if for the loan balance, you enter the balance as of the date a payment is due, then you should set this to "Yes." This prevents the calculator from adding the accrued interest since the last payment due date.

If you don't follow the above, please don't stress out. It won't make that big of a difference!

## Don't Forget the Charts

No doubt if you spend time going over the schedules, you may find your eyes glazing over. (For sure, there are a lot of numbers!) If you find that happening to you, or if you aren't a detailed "numbers person," make sure you check out the nine charts that the calculator automatically creates.

- Annual Totals without Extra Payments
- Annual Totals with Extra Payments
- Annual Investment Plus the Annual Gain
- Accumulated Totals without Extra Payments - running totals since the loan's origination
- Accumulated Totals with Extra Payments
- Accumulated Investments Plus the Total Gain - show year-over-year growth and final value
- Pie Chart Loan Payment Total Allocated to Principal and Interest
- Pie Chart Loan Payment Total Allocated to Principal and Interest with Extra Payments
- Pie Chart Showing Breakout of Investments and the Gain on the Investments

## Wrapping Up

When you were searching for an extra payment calculator, you probably just wanted to see how much interest you could save. You didn't expect there to be so many things to consider.

Don't feel as if you need to digest all of this in one sitting. Come back and try different scenarios. Make different assumptions.

But remember, the point is, no matter what decision you make, the calculator will help you to make an informed one.

You can let me know in the comments below.

## Extra Principal Payment Help

The accelerated payment calculator will calculate the effect of making extra principal payments. A minimal extra principal payment made along with a regular payment can save the borrower a large amount of interest over the life of a loan, particularly, if those payments start when the debt is relatively new.

For example, assume that you have taken out a loan for $130,000, for 360 monthly periods with an annual interest rate of 7 3/4%. If with the 49th payment, you start to pay an extra $225, you will save $75,901.42 in interest payments, and the loan will be paid off in 234 payments instead of the original 360 payments.

It is straightforward to calculate many different scenarios quickly. Note that the higher the interest rate, the greater the savings for any extra payment amount. Also, for a standard amortizing loan, the interest savings will be more significant the sooner the additional payments start. That is, you will save a lot more in interest if you pay an extra $50 a month for the last 20 years than if you pay an extra $100 a month for the previous ten years.

As with many of our other calculators, this calculator will also solve for an unknown input. For example, if you want the calculator to calculate the regular monthly payment, enter '0' (zero) for the "Periodic Payment" and a non-zero value for "Amount of Loan," "Total Months," and "Annual Interest Rate."

If you do not enter a '0' value, the calculator will use your inputs. This allows you to use any payment amount that you need.

## David says:

Am I missing something? I’m entering extra payments made weekly, but it does not calculate them as if made weekly; rather, it takes the payment amount and makes it monthly. That is, when I try to run calculations of making $25/week extra or $100/month extra to compare, the $25/week calculation only makes the payment monthly. It is as if the frequency variable isn’t working.

## Karl says:

I’m not having that problem. Perhaps there’s a bug if the steps are not executed in the same way I’m testing it.

Without changing anything, I click on the "Extra Payments/Investment Rate" and set the "Extra Payment Frequency" and set it to weekly to start on Sept. 15, and then I click on "Calculator" and the "Supporting Schedules" button.

I see weekly "XPmts" for $25.00.

Did you do other steps by any chance (beside change the loan details)? Maybe some step is not getting reset properly. If you still have the problem and can give me the details so that I can duplicate it, I can then fix it.

## Terri says:

Hi Karl I need some help!

I have a client with a loan for a piece of equipment for $128,123.12. that is the loan amount. The total amount paid including “pre-computed interest” is $149,500.00

I’m having problems running an amortization schedule due to the fact that #1 the loan agreement doesn’t tell me the interest rate. It only states that the rate is the “non-default” interest rate. ?? #2. The first payment is $10,000.00 due on the loan date which was 2/21/2019. The rest of the 36 monthly payments beginning 3/21/19 is $3875.00. Can you please advise?

## Karl says:

Hi Terri,

That’s an easy problem, but first, you need to be using the right calculator.

Please see the Ultimate Financial Calculator. 🙂

If you scroll down the page, there are a number of step-by-step tutorials that are listed. Everyone should read tutorial #1 to get a general idea of how to use the calculator.

However, since none of the tutorials is a perfect match for your needs, I’ll give you some guidelines as well.

I hope this helps (the interest rate will be calculated). Let me know how you make out.

## Terri says:

OK Great!! thanks Karl for your quick response…stay safe!

## Michael Carrozza says:

Absolutely fantastic calculator! Thank you for your time and effort in creating it.

I currently have 5 student loans with varied balances, interest rates, monthly payments, and number of payments remaining. I’m trying to determine how extra payments can most efficiently help me payoff all loans (1) in the shortest amount of time and/or (2) with the most saved in interest. I plan to begin with a fixed amount per month (e.g., $250), then add to that amount the monthly payment for each loan once it is paid off.

For example, suppose loan A has a balance of $8,000 at 7.25% with 150 payments remaining, and loan B has a balance of $25,000 at 7.75% with 90 payments remaining. Am I better off paying $250 extra per month towards loan A, then add that monthly payment to $250 as extra per month towards the remainder of loan B, or vice versa?

As I said, I have 5 loans, so while I can manually do the calculations in the two-loan example above, the math is too complex for five loans.

Do you have a calculator that can do that? Or, is it possible to use this calculator to determine this?

Many thanks!

## Karl says:

Thank you. I appreciate that.

Please try this debt calculator. It’s design so the user can test loan payoff strategies for multiple debts.

## Chris P says:

I want a calculator where I can modify the monthly payments over the next 3 years showing increased payment to determine when my home is paid off earlier. How can I do this?

## Karl says:

Please see the Ultimate Financial Calculator.

This calculator will allow the user to make as many extra payments as desired on what ever date required and for any amount. Extra payments may be a one-off or a series.

Scroll down the page to the tutorials. There are two available specifically about extra payments. Check out tutorial #1 for a calculator overview.

## Chris P says:

Thanks Karl, where is tutorial #1?

## Karl says:

Hi, all the links to the tutorials are on the page of the previously recommended calculator.

Once on the page, scroll down and there’s a list with links to 25 tutorials.

## Ro Patino says:

Thank you so much for this calculator! I was about to input different scenarios to see what would give the best outcome. I went with the extra lump payment yearly instead of the extra money payments even though the savings were extremely close. I wish I knew more about investing but I really don’t so I didn’t even consider investing the additional principal payment. My goal is to learn more about investing and hopefully by the next lump payment I will be able to compare both scenarios.

Thank you Karl!

## Karl says:

Thanks for your comment Ro, and for letting me know how you are using the calculator.

Just take it one step at a time. Calculators can be very useful as a teaching tool.

## Joe says:

I think the 30 years fixed mortgage’s amortization table is fixed. Unless you do a recast. That is the interests pay each month is fixed. Extra payment goes to principle but not saving interests each month. You save the interests by paying off early at the end. Now, why should I lock my extra money in the mortgage instead of investing somewhere else? I can achieve the same saving by paying off the loan early by a lump sum at the end. Basically my question is down to: does the amortization table recalculate each month on a 30 years fixed mortgage? Only if it does, then makes sense to pay more each month since interests will be reduced by the reduced principle. Thanks.

## Karl says:

When you use the term "fixed", I assume you are using it in the sense of a traditional 30-year, "fixed-rate" mortgage and not "fixed-principal" loan.

The key takeaway here is "fixed-rate", not "fixed-amount". The interest paid each month is NOT fixed. The interest is calculated using the loan’s current balance. So when one prepays the principal, the balance is lower, and the interest is lower than it would otherwise have been. So the interest savings come immediately and not just at the end of the loan, as you suggested.

Study the schedule this calculator creates. Compare a loan with no extra payments to one with even just one extra payment and you should see what I mean.

## Joe Wong says:

Thanks. Yes that’s what I meant of fixed. So you are saying the amortization table does get recalculate each month, right? Not just on arm loans but also 30 years fixed mortgages.

## Karl says:

Yes.

But I wouldn’t think of it really as being "recalculated." Anytime someone borrows money and they are given an amortization schedule, they are being given a projection. If the payments are always paid on the dates indicated, then at the end of the loan, that’s what they will have paid. But vary just one payment, by as much as one day, and the initial schedule will not be precise. Whenever a payment is paid, the lender will calculate how much of the payment is allocated to interest using the loan’s current principal balance, the days since the last payment, and the (fixed or current adjustable) interest rate.

## Tim says:

Is there a way to determine pay off date for a mortgage loan I have had since 2012. My wrinkle is that I have paid differing amounts over the required payment, for instance for 5 years I was paying 1250 on a loan that the required payment was 1068, and then for 2 years after that I was paying 1500 on the same loan. For the last year I have reduced it to just 32 over the required payment. I cant figure out a way to figure out what my expected pay off date should be?

## Karl says:

Yes, there is.

Please see this loan payoff calculator. It will allow you to record a payment on any date, for any amount. (You can change interest rates too.)

## Tim says:

Thanks Karl, that did the trick!

## Ben S. says:

Thank you for providing this resource. Using the Extra Payment Calculator I’m able to put in a $ 25,000 annual payment towards the loan but not an extra $ 200 per month also.

Trying to see an amortization schedule with these numbers :

Loan amount $ 245,000

15 year term

Annual payment of $ 25,000 towards the principal

Interest rate of 2.671 %

Extra monthly payment of $ 200

Bi- monthly payments

Any and all help would be appreciated

thank you

Ben

## Karl says:

You’re welcome.

You have two choices. This loan calculator supports independent extra payment, not tied to the loan’s payment schedule. And the regular schedule can be set up for annual payments.

For maximum flexibility, check out the loan payoff calculator. This calculator lets you enter payments in any amount, on any day you want to make them. Scroll down the page for a couple of tutorials dealing with extra payments.

## Harold says:

Found a couple of typos. Hopefully I don’t have a typo this time!

First off, let me congratulate you on paying of your own mortgage. I look forward to that day!

#1: “There’s a detail amortization schedule…” Shouldn’t that be “There’s a detailed…”

#2: “For here’s the thing. It is possible to be both free…” Maybe this is not a typo, but I don’t get the phrase “For here’s the thing”.

## Karl says:

Thank you. But now I’m paying off the kid’s student loans.

Typos’s fixed or edited. I use a grammar checker. But it does miss things, as you can see. Interestingly, it missed "detail" vs "detailed" two or so years ago when i wrote this page. But I see now it found it. As well as a lot of other things that should be considered.