how to calc savings due to overpaying monthly mortgage???
November 30, 2011 8:40 PM   Subscribe

How to calculate how much money I am saving overall by paying extra money on my monthly mortgage?

I've tried figuring this out using a mortgage calculator. It said that if I paid $3800 per month extra, I would save some tens of thousands of dollars over the length of the loan. but when I divided the saved total by the number of payments (in order to calculate the amount saved by each overpayment), the resulting amount was *less* than the overpayment (3800). This, to me, means that I am *not* saving money overall by overpaying. But my impression is the opposite.

Also, the calulator distringushed between "savings" and "real savings". Huh?
posted by anonymous_account to Work & Money (13 answers total) 5 users marked this as a favorite
"Real savings" is probably "savings" adjusted for inflation.
posted by madcaptenor at 8:45 PM on November 30, 2011

Likely, that's the interest saved per month by paying the principal down. That the two numbers resemble each other is coincidence.

Most large mortgage companies' websites have calculators which show the expected early payoff with various overpayment schemes. Try those.
posted by notsnot at 8:47 PM on November 30, 2011

There are a few things going on here.

Silly question, but did you divide by the total number of payments on the original payment schedule? You shouldn't, obviously, if you pay more each time, there will be fewer total payments.

3800 is a big extra piece of cash every month... I would be pretty shocked to see that extra amount per month only "save" you amounts in the 10's of thousands spectrum (unless the mortgage is a very short term mortgage...)

You need a calculator that lets you plug in additional "principal only" amounts.

There are probably other things going on as well.
posted by milqman at 8:50 PM on November 30, 2011 [1 favorite]

The amount you're saving is the amount of interest you're not accruing by paying down the principle of your mortgage. In other words, the overpayment is money you'd pay anyway. You're just paying it this month instead of in some month at the end of the mortgage term. By paying that money now instead of later, you pay less interest, because you pay off the house sooner, so no interest accrues in those months at the end when you would otherwise still have had a balance. That saves you quite a bit of money. The fact that the amount saved divided by the total number of payments is less than the monthly overpayment amount is meaningless.
posted by decathecting at 8:51 PM on November 30, 2011

There used to be a formula written in Excel that allowed the construction of a mortgage table for a simple-interest loan. You plugged in the amount of principle owed, the interest rate, the payment interval, payment amount and you could come up with the length of the loan and the total interest paid. It's easy enough to write this formula yourself. The first two figures are fixed and you can vary the interval and amounts to run different tables and compare what the total payments and, of course, total interest would be in various payment scenarios.

My credit union offered simple interest fixed rate loans; there was no penalty for early repayment or for altering either the frequency or amount of payment. After every payment, the interest is calculated on the new principal balance. This allowed me to pay more than required when I was able and to drop back to the expected amount if I had nothing extra. I could also pay every two weeks if that is how my paychecks were received. The interest was computed on the principal amount owed thus any extra over my agreed payment (which always covers interest due plus a principal payment) always went straight to paying down principal. You can also use these tables to figure what you need to pay as a down payment to make the most advantageous mortgage.

Before Excel, you had to find someone who would run a mortgage table for you. I believe there were books used by lenders for this purpose. Viva the personal computer.
posted by Anitanola at 10:54 PM on November 30, 2011

Here is a quick and dirty Loan Comparison in Google Docs:

Every extra Payment will reduce the Loan principal ahead of the agreed Schedule which will reduce the interest accrued in each future period. And you will also pay off the loan FASTER.

If you look at the above google docs example with assumptions:
- borrow 100,000
- at 5% p.a.
- repay Monthly 1,000 per month (days/ 365)

Schedule 1. then the total Payments will be 129,664. that is you basically pay 29,664 in Interest over the life of the Loan.

However if you pay instead a total of 1,500 every Month. then you will pay off the loan slightly quicker and the total payments to the Bank will be only 117,417. that is you pay only 17,417 in interest costs.

Your net savings over the LIFE of the LOAN is 12,247 in reduced interest costs.

The Savings / Real Savings is a further adjustment of this 12,247 to take into account the rate of inflation during the loan. If it were adjusted for inflation you would save slightly less than this 12,247 as money isn't expected to be 'worth as much' in the future.
posted by mary8nne at 2:41 AM on December 1, 2011 [2 favorites]

Supposing I take out a mortgage for £100,000 over 25 years and the interest rate is such that I would expect to pay £50,000 in interest.

Supposing I pay this all off in ten months by paying £10,000 per month. (I wish!)

I have saved close to the whole £50,000 in interest. Divide this saving by the total number of payments (10) and I saved £5000 per month, even though I paid twice as much.
posted by emilyw at 3:17 AM on December 1, 2011

When you pay extra can have a huge effect on the difference you ultimately pay, almost as much as how much you pay.

As explained in this Simple Dollar post, payments made every two weeks make a bigger difference in terms of interest than one single, larger payment does. This calculator shows how much you'd save in interest and loan term by doing that, and how much faster you could do it by making larger-than-half payments every other week.
posted by peanut_mcgillicuty at 6:33 AM on December 1, 2011 [1 favorite]

Let's say the calculator determined you "saved" $1200 per month. It probably means something like: You can either pay $5000 down the road or $3800 extra this month.

That is, you have to pay the $3800 either way, but paying it now means you don't have to pay $1200 later.
posted by losvedir at 6:45 AM on December 1, 2011

Not really the DIY answer you might be looking for - but contact your Financial Institution where you hold your mortgage.

They're usually quite happy to run the numbers for you, advise you of the savings, and make changes if necessary.

I work at a bank - depending on the type of mortgage you have you may face penalties for changing your payment structure. They should be able to advise you if you face any fees as well.

Since you're paying a monthly mortgage, the easiest way to save would be switching your payment structure to paying on a weekly basis, most clients can shave several years off their mortgage by making this simple adjustment, as by paying down the principal quicker (every week, as opposed to every month) less interest will accrue and build on itself over time.
posted by Mobilisinmobili at 7:19 AM on December 1, 2011

Here's an easy solution. Print out an amortization schedule with your specific info. You can find one here, and you can find them all over the internet. Recalculate by dropping the total loan amount you've paid toward the principal and make one for every year. I did it three times just now, at $150,00, and $145,000, and $140,000. Total payments dropped about $10,000 for every $5000 paid toward the principal using the 30-year mortgage and the default interest rate.
posted by raisingsand at 10:10 AM on December 1, 2011

Here's an explanation of Excel's PMT formula. Get Rich Slowly has a mortgage spreadsheet that you can grab. Put in the extra payments, and you'll the length of the mortgage shorten. Paying ahead doesn't get you a break if you run into trouble, and can't pay; it's not a revolving account.
posted by theora55 at 2:06 PM on December 1, 2011

emily has it right here. The calculator likely isn't counting your extra payments as savings. It's rightly an expense, or a transfer of assets from cash to home equity. The interest is the only expense you can save on here. In this sense, you are saving money over the course of the loan.

However, you are probably not saving money over the life of your mortgage, but not for the reasons suggested. Extra payments should be compared against what you would otherwise do with the money. My suggestion would be to place it in S&P 500 index funds in a tax advantaged retirement account. The return here is hard to gauge in the short run but generally expected to be higher than your mortgage. So if the choice is paying the mortgage or investing, then you'll lose money you would have otherwise had.
posted by pwnguin at 6:34 PM on December 1, 2011

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