Example - Accelerated Paydown of a Mortgage

Example - Accelerated Paydown of a Mortgage

Background     In this example, we will show the difference between a 30-year conventional loan and two methods of paying off the loan faster by making additional principal payments.

Scenario One     We will solve for the payment on a 30-year mortgage.

Scenario Two     We structure a biweekly mortgage. We will take the Monthly Payment Amount from the 30-year mortgage and divide it in half. This amount will be paid biweekly (every two weeks).

Making biweekly payments is a popular way of cutting the term of a mortgage. Since there are 26 biweekly periods in a year, you end up making the equivalent of one extra payment each year (26 biweekly half-payments are the same as 13 regular monthly payments).

Scenario Three     We will make monthly payments with a small addition to our regular monthly amount. The additional monthly amount will be equal to one monthly payment divided by 12. This method will accelerate the paydown of the mortgage, similar to a biweekly plan, but with fewer individual payments.

Scenario One Facts     Azevedo borrows $275,350 on July 1, 2025 to buy a new home. The loan calls for 360 monthly payments starting August 1, 2025. The annual interest rate is 7.125%.

Needed     The Monthly Payment Amount and the total interest that will be paid over the 30-year term.

Settings     This example assumes Normal amortization (Compute Method) and a Year Length of 365 days (set in the Calculations group on the Configuration ribbon).

  1. Enter the cash flow information for the loan as shown below.

** SCREEN SHOT HERE **

2. Press [F9], [Ctrl]+[U], or click Calculate from the Compute group to compute the Monthly Payment Amount.

The monthly payment on this 30-year loan is $1,855.08.

3. Click Totals from the Summarize group on the Home ribbon. TValue will display the following Totals dialog:

Totals Window

 

 

 

 

 

 

 

 

Solution     If you make all 360 payments of $1,855.08, you will end up paying $392,478.80 in interest over the term of the loan.

Scenario Two     Dividing the monthly payments on a 30-year mortgage in half and using that amount to make biweekly payments is a popular way of cutting the term of the mortgage. Since 26 half-payments (13 full payments) are made instead of 12 full payments, the loan will be paid off faster. So, the reason a biweekly loan works stems from the fact that one extra payment is made each year.

Scenario Two Facts     Take the Monthly Payment Amount for the Azevedo Loan of $1,855.08 and divide it in half. The Biweekly Payment works out to be $927.54 ($1,855.08 / 2).

Needed     The new term of the loan and the total Interest that will be paid on the loan.

  1. Enter the biweekly mortgage payment cash flow information as shown below.

    ** SCREEN SHOT HERE **

    Notice that the Compounding Period field is changed to Biweekly and Unknown has been entered for the Number of payments

  2. Press [F9], [Ctrl]+[U], or click Calculate from the Compute group to compute the Number of Biweekly Payments.
  3. From the Rounding dialog that appears, select Balloon and then click OK.
  4. Click Totals from the Summarize group. TValue will display the following totals:

 

Solution     The Biweekly Loan will be paid in full on January 12, 2038. The term of the loan will reduce from 360 months (30 years) to 614 biweekly payments (23.62 years). The total Interest paid on the Biweekly Loan will be $293,852.54.

Scenario Three     Making an additional principal payment with the regular monthly mortgage payment will save interest and reduce the term of a mortgage. TValue will automatically apply the additional payment amount to principal.

Scenario Three Facts     Take the Monthly Payment Amount for the Azevedo Loan of $1,855.08 and divide it by 12. The result is $154.59. We will add that amount to the regular Monthly Payment Amount of $1,855.08. The total Monthly Payment Amount will then be $2,009.67.

Needed     The new term of the loan and the total Interest that will be paid on the loan.

  1. Enter the additional principal payment cash flow information as shown below.

    ** SCREEN SHOT HERE **

  2. Press [F9], [Ctrl]+[U], or click Calculate from the Compute group to compute the Number of Monthly Payments.
  3. From the Rounding dialog that appears, select Balloon and then click OK.
  4. Click Totals from the Summarize group. TValue will display the following totals:

** SCREEN SHOT HERE **

Solution     The additional Principal Payment Loan will be paid in full on March 1, 2038. The term of the loan will be reduced from 360 monthly payments (30 years) to 284 monthly payments (23.67 years). The total Interest paid will be $294,761.00.

Summary  

Total Interest    

Loan Payoff Term  

30-year mortgage

$392,478.80

30 years *

Biweekly mortgage

$293,852.54

23.62 years *

Additional principal mortgage  

$294,761.00

23.67 years *

* The annual payments on the 30-year mortgage are $22,260.96 ($1,885.08 x 12). The annual payments on both the biweekly mortgage and additional principal mortgage are $24,116.04.