Accurate Extra Payment Calculator

You will save interest by making extra payments. However, you should also consider how much you could earn if you invested the funds instead. Some extra payment calculators perform this comparison calculation.

If you have $200 and use it to make a prepayment toward a loan, you cannot also use the same $200 for investing. Economists call this a foregone opportunity. The opportunity to do something else with that same $200 will not return.

How can you determine which decision is better?

Use this calculator to make the comparison.

The calculator uses your Your Investment Rate-of-Return value 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 value shown as Interest Saved Less Investment Gain).

Consider the following example.

When you open this page, you will see the calculator preloaded with a $260,386 loan or mortgage, and $200 per month as the default prepayment amount.

For the investment rate of return, the calculator uses a default of 7.2%, which is the approximate average rate of return for the S&P 500 according to this analysis, which is somewhat dated. The analysis is dated. However, considering stock market performance since that study, a 7% assumption for deciding whether to make extra payments on a loan is conservative.

You may use any rate of return you consider appropriate.

Using these default values, the results are as follows:

There are $52,829 in interest savings, and the mortgage that would normally require 360 payments will be paid off after 276 payments.

However, the investment result is even more significant.

If the borrower invests $200 per month, then after 276 months, the investment gain will be $81,238. The total value of the investment account will be $55,000 in extra payments invested plus the $81,238 gain, which equals $136,238.

This example shows that while a $52,000 interest savings is significant, an $81,000 investment gain is greater.

How much greater is this gain?

The difference is $28,409, as shown in the final result labeled Interest Saved less Investment Gain ($52,929 - $81,239).

If, after entering your own numbers, you also get a negative result, then you should consider not making extra payments. At least in theory, you would earn more from your investments than you would save in interest charges.

Select the “Supporting Schedules” button. There you will find all the supporting numbers used in the analysis above. You will see a detailed amortization report that lists the periodic payment, the interest charges, and the extra payments applied to the principal balance.

After the loan payment schedule, you will see a future value (investment) schedule. This schedule shows the capital gain from the invested extra payments.

When might it make sense to continue making extra principal payments even when the calculator indicates that investing could be the better option?

There are at least two situations in which you may decide not to invest the prepayment funds.

One reason is simple—risk.

Earlier, when explaining why prepaid principal reduces costs, I referred to a “mathematical certainty.” If the borrower makes the extra payments as planned, the interest savings are guaranteed. The lender can charge interest only on the outstanding balance.

By contrast, if you invest, even on schedule and in the intended amounts, the return is not guaranteed (although some investments may offer guaranteed returns). At the end of the loan term, you may not have the capital gains you expected. You could also have a larger gain than expected.

That uncertainty is the risk.

The second reason is the desire to live without debt. A borrower who takes out a 30-year mortgage may want to be debt free in 20 years. That motivation is understandable. I felt the same way, and I followed that approach—before creating this calculator.

However, it is possible to become debt free early while also following an investment strategy instead of a principal prepayment strategy. These choices are not mutually exclusive.

Here is the step-by-step explanation:

1. Review the example the calculator loads when you first open the page (reload your browser to reset the values). As of this writing, the final payment is scheduled for March 1, 2046. Note this as the debt-free date with extra payments.
2. Set the extra payments to 0 and review the schedule. This schedule shows no additional payments. Find the balance as of the debt-free date. As of this writing, the balance is $92,929.
3. Reenter the extra $200 payment amount and review the investment schedule that follows the loan schedule. (The calculator creates an investment schedule only when an extra payment amount is entered and the option “Include the Investment Schedule?:” is set to “Yes.”)
   • With prepaid principal payments, the loan is paid off in 276 payments, or 23 years.
   • On March 1, 2046, the investment account balance is $136,238.
   • You can pay off the mortgage using the investment account, become debt free on the planned date, and still have nearly $40,000 remaining.

There is an important consideration.

This analysis does not include taxes. In the U.S., some interest may be deductible (although this is less certain than in the past). Investment gains may also be taxable, which reduces the illustrated gain.

However, taxes are not always unavoidable. Tax-free bonds generate tax-free income (although results may be lower). If you invest and do not sell, the gain compounds without current tax. Tax is paid only when you sell, and long-term capital gains rates are often favorable.

These tax issues are important to evaluate. Adding every tax scenario to the calculator would create complexity and confusion for most users.

Your situation may differ from this example. Use the Extra Payment Calculator to see how much you can save and when your loans will be paid off.

Here are several additional features the calculator supports.

If you do not plan to make extra payments monthly, the calculator allows you to choose from 11 payment frequencies, independent of the regular payment schedule.

If you receive an annual bonus and want to apply it to principal, the calculator will still compute your savings. You can schedule one or two extra payments per year.

If you want to make a single extra payment, the calculator supports a one-time payment on any date during the loan term. For example, you might receive an inheritance and decide to reduce the principal. The calculator will show your interest savings and your new payoff date.

Be sure to review the printable schedule for full details.

The loan itself does not have to follow a monthly schedule. The final option on the Extra Payment tab allows you to select any payment frequency.

The calculator is not limited to new loans. If you have been paying a loan for several years and have received a raise, you can analyze extra payments on the existing loan. Enter the following four inputs:

• The loan 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 your loan’s terms in the analysis.

There is also one important setting. On the “Extra Payments/Investment Rate” tab, review “Is a Regular Payment Due Today?:” The default is “No.” If you enter a balance as of a payment due date, set this to “Yes” to prevent the calculator from adding accrued interest.

If this detail is unclear, do not worry. The difference is usually small.

Schedules contain many figures and can be difficult to review. If you prefer visual summaries, the calculator automatically creates nine charts.

• 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—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: Investments and the Gain on Investments

When you searched for an extra payment calculator, you likely wanted to know how much interest you could save. You may not have expected this many considerations.

You do not need to review everything at once. Return as needed and test different scenarios.

Regardless of your choice, the calculator helps you make an informed decision.

If you wish, share the approach you plan to take and whether the calculator was helpful. Suggestions for improvement are welcome.

Use the comments section below.