January 26, 2015 in Mortgages

How lump-sum payment affects mortgage

Dear Dr. Don,

I switched to a 15-year mortgage about four years ago. There’s now about 11 years left on the note. The interest rate is 4.75 percent. I’m curious how a \$50,000 one-time payment made toward interest affects the payoff date. I’m aware of the tax impact, but I’d like to have the peace of mind of owning my home free and clear. I still owe \$220,000 on the mortgage.

Thanks,

— Jason Jericho

Dear Jason,

Bankrate’s mortgage payment calculator lets you apply a one-time payment to your mortgage and will show you how it changes the payoff date. An amortization schedule presented with the calculator will show you how your total interest expense changes, too.

Input the loan balance, interest rate and remaining term of your mortgage. The table below shows how the \$50,000 additional principal payment reduces the interest expense and shortens the loan term.

Current mortgage \$50,000 additional principal payment Refinance
Loan amount \$220,000 \$170,000 \$170,000
Interest rate 4.75% 4.75% 3.29%
Loan term (months) 132 96 90
Loan payment \$2,143.05 \$2,143.05 \$1,664.39
Monthly additional principal payment \$0 \$0 \$478.66
Total monthly mortgage payment \$2,143.05 \$2,143.05 \$2,143.05
Total interest expense \$62,882.87 \$34,734.57 \$21,960.30

I also took a look at refinancing your current mortgage with a new 10-year mortgage. I envisioned you bringing \$50,000 to closing and assumed that you would make additional principal payments each month so that your monthly mortgage expense roughly matches your current payment. That shaves another half a year off the effective loan term and about another \$13,000 in interest expense. The table doesn’t consider the reduction in your mortgage interest deduction on your taxes or the costs associated with refinancing. I assume your credit, equity and income are sufficient to refinance.

3.29 percent was the Bankrate national average for a 15-year fixed-rate mortgage when I wrote this. A 10-year mortgage should generally have a slightly lower interest rate. Check to see how the rates may have changed since.

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