Calculate how long to pay off mortgage with extra payments -
Loan Calculator Paying Extra On Principal
Making extra payments on your mortgage can drastically reduce the number of years on the loan . . . and can save you a tremendous amount of interest. How much interest can you save with an extra payment every month? Take a look . . .
|Initial Loan Amount||$100,000||$200,000||$300,000|
|Term of the Loan||30-years||30-years||30-years|
|Extra Monthly Payment||$100||$100||$100|
|SAVINGS||Save $30,580 in interest. You will pay off your mortgage 8 years and 8 months early.||Save $37,069 in interest. You will pay off your mortgage 5 years and 2 months early.||Save $39,937 in interest. You will pay off your mortgage 3 years and 8 months early.|
If you’re thinking about refinancing your mortgage to a lower interest rate or decreasing the length of the mortgage, you might be wondering if it would be better to make an extra payment instead of going through the refinance process. The extra payoff calculator will estimate the time you can payoff the mortgage starting with your present balance.
This calculator will not accept partial months. For example, 26 years and 1 month. Please use whole numbers.
Frequently Asked Questions About Extra Payments
Q. Can I be charged a penalty for paying off my mortgage early?
A. The answer is maybe. Here's what the Consumer Financial Protection Bureau says about prepayment penalties:
The kind of mortgage you have and the conditions of your loan affect whether or not you will be punished for paying off your mortgage early.
Certain loans include prepayment penalties in the early years of the loan.
These costs may rapidly mount up for homeowners who want to refinance their adjustable-rate mortgages before interest rates increase, and some fixed-rate mortgages also contain prepayment penalties.
Many states have laws that limit the amount or duration of time that these penalties may be imposed.
The presence of a prepayment penalty on your loan must have been disclosed in your loan documents.
It's often only disclosed in an "Addendum to the Note"-look for anything with the word "Addendum" in the title.
SOURCE: Consumer Financial Protection Bureau
Q. Can you pay ahead on your mortgage?
A. Call the mortgage company before you start making additional payments to get ahead on your mortgage.
The extra mortgage payments will very certainly be allocated to principle rather than future mortgage payments.
If the extra mortgage payments are allocated to principal reduction and you fail to make the following month's mortgage payment, the mortgage company will charge you a late fee and record a late or overdue payment on your credit report.
If you need to pay ahead for vacation or other reasons, contact your mortgage provider and, if they agree, get it in writing.
Or, even better, locate a trustworthy friend or family member to make the payment (s), or have the payment automatically deducted from a checking or savings account.
Q. Do extra mortgage payments go towards the principal?
A. The extra mortgage payment will be applied to principal on FHA, VA, USDA, and conventional loans... but, you should call the bank, mortgage company, or servicer just to make sure that the overpayment will be applied to principal. The lender may have specific requirements for the overpayment. Always keep your mortgage statements to prove the overpayment (s).
Q. Do FHA loans have a prepayment penalty?
A. Prepayment penalties are prohibited with FHA, VA and USDA mortgages
Q. How much do you save by making one extra mortgage payment a year?
A. Making just one extra mortgage payment each year can drastically reduce the amount of interest you pay and shorten the term of your mortgage. Here's an example:
|Total Monthly Payments :||$483,133.89|
|Total Monthly Payments :||$461,835.60|
|Mortgage Payoff||27 Yrs 8 Mts|
|Early Payoff||2 Yrs 4 Mts|
Q. Is it better to pay the principal or interest?
A. Interest is calculated on the principal balance, therefore, extra payments should always be paid against the principal balance and the interest balance will decrease.
Q. Is mortgage interest calculated daily or monthly?
A. Mortgage interest is typically calculated monthly
How long will it take to pay off my loan
How long will it take to pay off my loan?
By making consistent regular payments toward debt service you will eventually pay off your loan. Use this calculator to determine how much longer you will need to make these regular payments in order to eventually eliminate the debt obligation and pay off your loan.
This calculator is property of CalcXML and licensed for use on dcu.org. It is provided as a self-help tool for your independent use. The results shown are based on information and assumptions provided by you regarding your goals, expectations and financial situation. Applicability or accuracy in regard to your individual circumstances is not guaranteed. All sample ranges provided within calculator fields do not reflect actual loan terms available and examples are hypothetical for illustrative purposes only and are not intended to purport actual user-defined parameters. Default figures shown are hypothetical and may not be applicable to your individual situation. Calculation results does not indicate whether you qualify or assumes you could qualify for the loan, product or service. The calculations provided should not be construed as financial, legal or tax advice. Consult a financial professional prior to relying on the results presented.
How to Calculate How Fast a Loan Will Pay Off
By: Mark Kennan
Typically, loans come with a preset term for you to pay off the balance, such as three to five years for a car loan or 15 to 30 years for a mortgage. However, if you're planning to make extra payments, you can pay off the loan even faster. How much faster depends on the interest rate, how much you owe and how often you make payments.
To start, first figure the periodic interest rate on your loan by dividing the annual rate as a decimal by the number of payments you make per year. Second, multiply the periodic rate by the amount you owe. Third, divide the result by the amount you pay each month. Fourth, subtract the result from 1. Fifth, take the log of the result and then make the result positive -- hold on to that number, you'll need it in a few steps. Sixth, add 1 to the periodic rate as a decimal. Seventh, take the log of the result. Finally, divide the result from step 5 (you've been holding on to it, right?) by the result to find the number of payments you have to make until the loan is paid off.
Suppose you have a $25,000 loan at 6.6 percent interest that you make $600 monthly payments on. First, divide 0.066 by 12 to find the periodic interest rate equals 0.0055. Second, multiply 0.0055 by $25,000 to get $137.50. Third, divide the result by 0.0055 to get 0.229166667. Fourth, subtract 0.229166667 from 1 to get 0.770833333. Fifth, take the log of 0.770833333 to get -0.113039513 and make it positive to get 0.113039513. Sixth, add 1 to 0.0055 to get 1.0055. Seventh, take the log of 1.0055 to get 0.002382075. Finally, divide 0.113039513 by 0.002382075 to get 47.45, meaning it will take just over 47 months to pay off the loan.
Adjustable Interest Rates
If your loan has an adjustable interest rate, the actual time it takes you to pay off the loan will vary depending on how interest rates change in the future. Unless you have a crystal ball -- in which case you probably wouldn't need to borrow money anymore -- there's no way to predict with certainty how interest rates are going to change. So, if the rate on your loan changes, you're going to have to run the numbers all over again. If the rate goes up, it'll take longer, but if it falls, you'll be debt-free faster.
Prepayment Penalties and Add-on Interest
Sometimes lenders tack on extra penalties if you pay the loan off ahead of schedule. While you might still save money on interest, even after accounting for the penalty, you need to consider these extra costs. Worse, some lenders use "add-on interest" to figure your loan payments, which means that the interest is figured at the start of the loan and added to the balance immediately, so prepaying the loan doesn't decrease the amount of interest you'll pay over the life of the loan.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."
With mortgage interest rates near record lows, refinancing your current mortgage might seem like a no-brainer. Millions of homeowners could lower their monthly payments and save on long-term interest.
But what if you already have an ultra-low rate? Or you’re nearly done paying off your home loan?
In some cases, starting your mortgage over with a refinance won’t make sense. Luckily, you can still save on interest — and potentially pay off your home early — by paying extra toward your mortgage.
Here’s how to choose the right strategy.Verify your refinance eligibility. Start here (Dec 5th, 2021)
In this article (Skip to…)
Knowing when to refinance — or when to keep your existing loan and make additional payments — depends on your financial goals and specific needs.
Everybody’s situation is a little different, but here’s a quick way to assess your own scenario:
It’s usually better to refinance when:
- You expect to stay in the home a long time. The upfront costs of refinancing pay off when you stay in the home long enough to benefit from the new loan’s savings
- You’re not far into the existing loan. If you’ve only had your existing mortgage a few years, you’re more likely to save money in the long run by refinancing
- You also want to tap home equity. With a cash-out refinance you can save on interest and get cash back to renovate your home, consolidate credit card debt, or use for any other purpose
- You can qualify for a low rate. Unless you’re doing a Streamline Refinance, your mortgage lender will check your credit score and debt-to-income ratio to determine your rate. Borrowers with great credit, low debt levels, and plenty of home equity have access to some of the best rates and biggest refinance savings
If one or more of these conditions is true for you, you’re probably a good candidate to refinance and pay less interest at today’s historically low rates.
- You plan to sell the home soon. You could waste time and money refinancing if you sell the home within a couple years. Consider making extra payments on your mortgage principal balance to lower your loan amount instead
- You’re well into a 30-year loan. If you’re a decade or more into a 30-year loan, you’ve already paid off a big chunk of the loan’s total interest. Starting your amortization schedule over with a new loan could increase your total cost — even if the monthly payments are lower
- You can’t get a competitive rate. Today’s best refinance rates go to borrowers with higher credit scores and lower debt loads. If this isn’t you, consider making additional payments on your existing loan rather than refinancing, at least until you improve your credit profile
If one or more of these conditions describes your situation, making extra loan payments might offer a better — and more cost-effective — path forward.
If you’re still not sure where you stand, read on. We’ll dig deeper into the details of refinancing vs. making extra mortgage payments.Check your refinance savings. Start here (Dec 5th, 2021)
Benefits of refinancing
Historically low interest rates during the coronavirus pandemic have prompted millions of homeowners to refinance.
But there’s more to refinancing than just the interest rate.
Refinancing offers a chance to start over. You’ll be getting a new loan to pay off your existing mortgage. And along with lowering your rate, a new loan gives you a chance to improve your financial situation.
For example, a new mortgage could:
- Reduce your total interest cost over the life of the loan
- Lower your monthly mortgage payment
- Shorten your mortgage term
- Generate cash back from your equity to consolidate debt
- Replace an adjustable-rate mortgage with a fixed-rate loan
- Change loan types so you can remove mortgage insurance
Many banks use interest rates to market their loans. As a result, borrowers tend to measure a loan’s savings only in terms of interest.
But even if you don’t save big on your interest rate, a refinance loan could help you accomplish any of the financial goals above.
Drawbacks of refinancing
Refinancing is a good idea only when your new loan will benefit you in the long run.
For instance, if you need to lower your monthly payment by $200 to afford your monthly expenses, and you can get that done with a refinance, the new loan probably makes sense.
But if you’re trying to reduce your overall mortgage expense, and refinancing adds to that cost, you should probably pass.
Even with a lower rate, your new loan could add to your overall mortgage expense if you:
- Stretch out your payments too long. Time is a key ingredient in interest payments. Starting over with a new 30-year loan adds a lot of time to this equation
- Take cash out for shorter-term goals. Borrowing against your home equity makes the most sense when you’re paying for long-term needs like tuition or home improvements. It’s likely not wise to cash-out for short-term needs like vacations or living expenses
- Think you’ll move soon. It will take time for your refinance savings to ‘break even’ with the upfront cost of refinancing. Selling the home and paying off your mortgage early could prevent you from ever realizing your new loan’s savings potential
Is a lower interest rate enough to make refinancing worth it despite these obstacles? That will depend on your financial situation.
You can use a refinance calculator to estimate your savings or talk to a loan officer for an exact answer.
Check your refinance savings. Start here (Dec 5th, 2021)
Sometimes, it makes more sense to pay down the principal balance on your existing loan instead of getting a new loan.
Also known as ‘accelerated payments,’ this strategy involves paying a lump sum toward your mortgage principal balance.
By doing so, you lower the outstanding loan amount — and therefore reduce the balance you’re paying interest on. This can lower your total mortgage cost and even help you pay off your home early.
There are a few ways you can pay extra on your mortgage. Popular strategies include:
- Making one extra payment each year. If you can make 13 payments instead of 12 every year, you could shave a few years off your loan term. You could turn your tax return or holiday bonus into a mortgage payment
- Paying your mortgage bi-weekly. This allows you to make an extra payment each year without making a full payment all at once. Essentially, you’d pay half your monthly loan payment every other week rather than making the full payment once a month, which results in 13 total payments each year
- Making larger payments. You could add $100 or $200 a month to your monthly payment. The key is to do this regularly so you’ll see long-term savings, and you’ll also need to make sure the extra money goes toward your principal (not interest)
These are good ways to save on interest and repay your loan sooner. But these strategies won’t lower your monthly payment the way a refinance can.
Another option: Recast your mortgage
Your loan servicer may be willing to re-amortize your mortgage after you pay a lump sum toward your principal. This is also called “recasting” your home loan.
The lender takes your principal reduction and then re-calculates your payment based on the remaining years of your home loan and the remaining balance.
In this way, recasting your mortgage can lower your monthly payments without the upfront cost of a refinance. But note: your interest rate will stay the same.
Lenders have rules about recasting. For one, you cannot do it with government-backed loans (FHA, VA, or USDA). And some lenders have minimum principal reductions you must make in order to qualify for a mortgage recast. For instance, you might need to pay $5,000 or 10% of the mortgage loan balance.
There’s typically a small upfront cost, too. It often costs around $250 to re-amortize your mortgage. (Of course, that’s very little compared to refinance closing costs, which are usually 2-5% of the loan amount).
The easiest way to tell if refinancing is worth it for you is to use an online mortgage refinance calculator.
This lets you model your potential savings versus the expected cost of refinancing. That way, you can see when you’d break even and how much you’d save in the long run.
Let’s take a look at one example.
Suppose you plan to sell your house and move in four years. In the meantime, you’re trying to decide whether you should refinance or make extra principal payments to save money. Assume that:
- You’ve had the loan 3 years
- It’s a 30-year fixed-rate mortgage
- Your current interest rate is 4.0%
- You could refinance to a rate of 3.75%
- Your refinance closing costs would be $5,400
First, calculate how much you could save each month by refinancing. The mortgage calculator tells you:
- Your current mortgage payment is $1,432
- After three years, your remaining balance is $283,496
- At 3.75%, your new payment is $1,313, which is $119 less than your current payment
However, you must always consider the cost of refinancing when deciding if it makes sense.
- Say you spent $5,400 on refinance closing costs
- You save $119 a month on payments, or $5,712 over four years
- If you still want to move in four years, your savings will have just canceled out what you spent to refinance
- But if you decide to move earlier — say, in two years — you will have only saved $2,856
- In that case, your refinance cost you $2,544 more than it saved you
If you won’t stay in the home long enough to break even, or you want to avoid the out-of-pocket closing costs, refinancing might not be your best bet.
You might also want to avoid a refinance if you’ve had your mortgage for a long time.
Remember that refinancing starts your loan over at day one. If you’re 15 years into a 30-year mortgage, starting over for a new 30-year term might not be particularly attractive.
In this case, paying extra might make more sense than pursuing a refinance.
Explore all your refinance options
Keep in mind that a conventional 30-year refinance is not your only option. There are various types of refinance loans, and one might fit your needs better than another.
For example, refinancing from a 30-year to a 15-year mortgage saves a lot in long-term interest payments.
But keep in mind that a 15-year loan also requires a higher monthly payment. If you’re not sure about committing to those higher payments, making extra principal payments when you could be an ideal compromise.
Another option is refinancing to a different type of loan.
For instance, if you currently have an FHA loan — but your credit score is above 620 and you’ve built up 20% home equity — you could likely refinance to a conventional loan with no PMI. This could get you a lower interest rate and reduce your monthly payment by eliminating mortgage insurance payments.
If you have a government-backed loan (FHA, VA, or USDA) you should also consider the possibility of a Streamline Refinance.
Streamline refinances have less paperwork, so the process is usually smoother and faster. And you might have reduced closing costs as well.
Shop around to get the lowest refinance rates
If you decide to refinance, be sure to maximize your savings by comparison shopping.
Interest rates can vary by half a percent (0.50%) or more between lenders — which equates to a major difference in your monthly payments and long-term cost.
Today’s mortgage rates are so low that refinancing might make sense for you now, even if it did not a year ago.
Check with several competing lenders to make sure you’re getting the best deal.
Verify your new rate (Dec 5th, 2021)
Extra Mortgage Payments Calculator
Save Thousands in Interest Expenses by Paying Your Loan Off Early With Additional Payments
Financial Analysis (Switch to Plain English)
|Loan||Original Schedule||Additional Payment|
|Monthly Principal & Interest Payment:||$1,088.02||$1,138.02|
|Total Monthly Payments:||$391,682.75||$380,277.66|
|Length:||30 Yrs 0 Mts||27 Yrs 11 Mts|
|Time Saved:||2 Yrs 1 Mts|
Your Results in Plain English (Switch to Financial Analysis)
When it comes to a home mortgage loan, you can actually pay off the loan much more quickly and save a great deal of money by simply paying a little extra each month.
If you take out a 30 year loan for $250000.00 with a 3.250% interest rate, for example, your monthly payment (interest and principal only) will be $1,088.02. By the time the 30 year time period is complete, you will have paid $391,682.75 for your home.
If you make the initial extra payment amount you entered and pay just $50.00 more each month, you will pay only $380,277.66 toward your home. This is a savings of $11,405.09. In addition, you will get the loan paid off 2 Years 1 Months sooner than if you paid only your regular monthly payment.
This calculator allows you to enter an initial lump-sum extra payment along with extra monthly payments which coincide with your regular monthly payments. We also offer three other options you can consider for other additional payment scenarios.
Want to Make Irregular Payments? Do You Need More Advanced Calculation Options?
- Biweekly Payment Method: Please see our bi-weekly mortgage calculator if you are using biweekly payments to make an effective 13th monthly payment.
- Extra Payments In The Middle of The Loan Term: If you start making extra payments in the middle of your loan then enter the current loan balance when you started making extra payments and set the loan term for however long you have left in the loan. For example, if you are 3.5 years into a 30-year home loan, you would set the loan term to 26.5 years and you would set the loan balance to whatever amount is shown on your statement. If you do not have a statement to see the current balance you can calculate the current balance so long as you know when the loan began, how much the loan was for & your rate of interest.
- Irregular Extra Payments: If you want to make irregular extra contributions or contributions which have a different periodicity than your regular payments try our advanced additional mortgage payments calculator which allows you to make multiple concurrent extra payments with varying frequencies along with other lump sum extra payments.
For your convenience current Los Angeles mortgage rates are published underneath the calculator to help you make accurate calculations reflecting current market conditions.
Refi Today & Save: Lock-in Los Angeles's Low 30-Year Mortgage Rates Today
How much money could you save? Compare lenders serving Los Angeles to find the best loan to fit your needs & lock in low rates today!
By default 30-yr fixed-rate loans are displayed in the table below. Filters enable you to change the loan amount, duration, or loan type.
Exercising Additional Payment Options
When you sign on for a 30-year mortgage, you know you're in it for the long haul. You might not even think about trying to pay off your mortgage early. After all, what's the point? Unless you're doubling up on your payments every month, you aren't going to make a significant impact on your bottom line — right? You'll still be paying off your loan for decades — right?
Not necessarily. Even making small extra payments over time can shave years off your loan and save you thousands of dollars in interest, depending on the terms of your loan.
Early Loan Repayment: A Little Goes a Long Way
One of the most common ways that people pay extra toward their mortgages is to make bi-weekly mortgage payments. Payments are made every two weeks, not just twice a month, which results in an extra mortgage payment each year. There are 26 bi-weekly periods in the year, but making only two payments a month would result in 24 payments.
Instead of paying twice a week, you can achieve the same results by adding 1/12th of your mortgage payment to your monthly payment. Over the course of the year, you will have paid the additional month. Doing so can shave four to eight years off the life of your loan, as well as tens of thousands of dollars in interest.
However, you don't have to pay that much to make an impact. Even paying $20 or $50 extra each month can help you to pay down your mortgage faster.
Calculating Your Potential Savings
If you have a 30-year $250,000 mortgage with a 5 percent interest rate, you will pay $1,342.05 each month in principal and interest alone. You will pay $233,133.89 in interest over the course of the loan. If you pay an additional $50 per month, you will save $21,298.29 in interest over the life of the loan and pay off your loan two years and four months sooner than you would have.
You can also make one-time payments toward your principal with your yearly bonus from work, tax refunds, investment dividends or insurance payments. Any extra payment you make to your principal can help you reduce your interest payments and shorten the life of your loan.
Considerations for Extra Payments
Pay Off Higher Interest Debts First
Paying off your mortgage early isn't always a no-brainer. Though it can help many people save thousands of dollars, it's not always the best way for most people to improve their finances.
Compare your potential savings to your other debts. For example, if you have credit card debt at 15 percent, it makes more sense to pay it off before putting any extra money toward your mortgage that has only a 5 percent interest rate.
Further, unlike many other debts, mortgage debt can be deducted from income taxes for those who itemize their taxes.
Also consider what other investments you can make with the money that might give you a higher return. If you can make significantly more with an investment and have an emergency savings fund set aside, you can make a bigger financial impact investing than paying off your mortgage. It is worth noting volatilility is the price of admission for higher earning asset classes like equities & profits on equites can be taxed with either short-term or long-term capital gains taxes, so the hurdle rate for investments would be the interest rate on your mortgage plus the rate the investments are taxed at.
Paying extra toward your mortgage may not make sense if you aren't planning to stay in your home for more than a few years. You won't pay down your equity fast enough to make it worth your while if you are planning to move in less than five to 10 years. You should also carefully evaluate the trends in your local housing market before you pay extra toward your mortgage.
Calculating Your Mortgage Overpayment Savings
Start Paying More Early & Save Big
Want to build your home equity quicker? Use this free calculator to see how even small extra payments will save you years of payments and thousands of Dollars of additional interest cost. Making extra payments early in the loan saves you much more money over the life of the loan as the extinguised principal is no longer accruing interest for the remainder of the loan. The earlier you begin paying extra the more money you'll save.
Use the above mortgage over-payment calculator to determine your potential savings by making extra payments toward your mortgage. Put in any amount that you want, from $10 to $1,000, to find out what you can save over the life of your loan. The results can help you weigh your financial options to see if paying down your mortgage will have the most benefits or if you should focus your efforts on other investment options. As you nearly complete your mortgage payments early be sure to check if your loan has a prepayment penalty. If it does, you may want to leave a small balance until the prepayment penalty period expires.
Homeowners May Want to Refinance While Rates Are Low
The Federal Reserve has hinted they are likely to taper their bond buying program later this year. Lock in today's low rates and save on your loan.
Are you paying too much for your mortgage?
Find Out What You Qualify For
Check your refinance options with a trusted local lender.
Answer a few questions below and connect with a lender who can help you refinance and save today!
Should You Pay Off Your Mortgage Early?
If you find yourself with a little extra cash at the end of the month, should you put it toward your mortgage loan? There’s no simple “yes” or “no” answer. There are both risks and benefits to paying off your loan early, and the right decision will be different for everyone. In this section, we’ll look at a few instances in which it makes sense to pay off your mortgage early – and when it doesn’t.
When Paying Off Your Mortgage Early Works
You might assume that you need to shell out hundreds of extra dollars each month to pay off your mortgage early. The truth is, even a very small monthly or one annual payment can make a major difference over the course of your loan.
Contributing just $50 extra a month can help you pay off your mortgage years ahead of schedule. You don’t need to find a way to earn an extra $10,000 a year to pay off your mortgage.
Play around with our Rocket Mortgage® mortgage amortization calculator to see for yourself how a small amount of money can impact your loan. It might surprise you. Most people can manage to save at least a few thousand dollars in interest with a small monthly extra payment. This is especially true if you start paying more on your loan in the early years of your mortgage.
The best candidates for early mortgage payoffs are those who already have enough money to cover an emergency. You’ll want at least 3 – 6 months’ worth of household expenses in liquid cash before you focus on paying off your mortgage. This is because it’s much more difficult to take money out of your home than it is to withdraw money from a savings account.
When Making Minimum Monthly Payments Works
It may not be a good idea to focus on paying off your mortgage early if you have other debt to worry about. Credit card debt, student loan debt and other types of loans often have higher interest rates than most mortgages. This means that they accrue interest faster.
You’ll save more money by paying these debts down than you would if you put all your money toward your mortgage. Sit down with your financial paperwork and compare interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, pay them down first.
You also may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest.
This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.
Consult your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment. Prepayment penalties are also in your mortgage contract.
When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works
You should have a robust household emergency fund before you think about paying extra cash toward your mortgage. An unexpected auto bill, medical expense or other cost can upset your budget if you don’t have any liquid cash.
While it’s possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may also want to put off paying off your mortgage if you have another big expense coming up. Your priority should be putting money into your 401(k) or IRA. You might also want to consider diverting your extra money into a child’s college fund or into savings for an upcoming vacation or wedding.
There’s no point in paying off your mortgage if it means going back into debt in the future.
Loan Payoff Calculator
How long will it take to pay off my loan?
When you repay a loan, you pay back the principal or capital (the original sum borrowed from the bank) as well as interest (the charges applied by the bank for their profit, which grow over time). Interest growing over time is the really important part: the faster you pay back the principal, the lower the interest amount will be.
E.g. You borrow $40,000 with an interest rate of 4%. The loan is for 15 years. Your monthly payment would be $295.88, meaning that your total interest comes to $13,258.40. But paying an extra $100 a month could mean you repay your loan a whole five years earlier, and only pay $8,855.67 interest. That’s a saving of $4,402!
Play around with our Loan Payoff Calculator, above, to see how overpayments can shorten the length of your loan.
The following guide focuses particularly on student loans, but the tips and advice can apply to all types of loans. So read on to learn how to shorten and shrink your loan.
How long will it take me to pay off my student loan?
The value of your student debt depends on a number of factors: where you studied, when you studied, and how long for. Ultimately though, the general rule remains the same: the more you pay towards it, the faster the debt will shrink.
Whether you really need to concern yourself with overpaying to shrink the debt is dependent on where you studied. British students have a more relaxed, means-tested approach, whilst US students face a harsher system and therefore more urgency in paying off their loans.
How long will it take me to pay off my student loan: UK?
In the UK, student loans are repaid as a percentage of earnings, and only when your annual income is over a certain threshold. So when you’re not earning — or not earning much — you don’t need to make any loan repayments.
Of course, interest still accrues over this time, so any ‘downtime’ where you’re not paying off your loan means that there will be more to repay in the long run. However, and this is the critical part, the slate is wiped clean in the end; there will never be a knock at the door demanding a huge, snowballed sum of money if you’ve been making low or no repayments.
Depending on the year in which you took out your loan, it will simply be written off after 25 years, 30 years, or when you turn 65. Phew. For this reason, repaying a student loan in the UK can be considered to work a bit like a ‘graduate tax’, applied in a similar way as income tax or national insurance.
How long will it take me to pay off my student loan: USA?
In the US, a student loan is treated more like a traditional bank loan. It requires regular repayments, whatever the circumstances. It will not be written off after a certain amount of time, so small repayments can feel stressful for the borrower, who is aware that the interest is constantly growing.
How to pay off a loan faster
The first rule of overpaying is to speak to the lender to ensure that any extra money you send comes off the principal debt, and not the interest. Paying off the principal is key to shortening a loan. Our Loan Payoff Calculator shows you how much you might save if you increased your monthly payments by 20%.
Increase monthly payments to repay your loan faster
- If your credit score is good enough, consider refinancing for a lower interest rate. Shifting the debt to a more affordable lender would free up some of that extra interest money to make a dent in the principal instead.
- Do you pay off your loan on a monthly basis? Switching to biweekly payments means you would make 13 payments a year instead of 12, getting the principal reduced faster without a huge difference to your monthly budget.
- Try downloading a ‘round-up’ savings app such as Acorns, Qoins, Digit or Chime. These apps link to your bank cards, and whenever you make a purchase online or in-store, they round it up to the nearest dollar or pound to siphon the difference into your savings (or in some cases, directly onto loan repayments). So if you spend $3.80 on a coffee, the app calls it $4 and moves $0.20 across to your savings. For each purchase, the difference feels negligible, but it all adds up quickly in your savings. You can use our Savings Goal Calculator to work out how long it might take to reach a target figure.
- Are you due a pay rise? Next time your salary increases, try to keep your living costs the same as before and use any monthly surplus to pay off your loan.
- Go through your bank statements to see if you’re paying for any subscriptions you don’t actually use. TV channels, magazine subscriptions, domain name renewals, premium delivery services, audiobooks… Anything that you don’t actually use can be cancelled, and you can reallocate that money to pay off the principal of your loan.
Use a lump sum to pay off your loan faster
Tax refund, bonus, commission, inheritance, yard sale, gift or lottery win? Whatever it may be, an unexpected windfall can be used to pay off a chunk of the principal in one fell swoop.
So there you have it. Check out our loan payoff calculator to see how overpayments can help you save money in the long run.