About Additional Payment Calculator

The formula for calculating Additional Payment is not quite simple, and it requires certain steps below:

First, find out the present value of the outstanding balance on the loan

Next would be to find out the tenure with the new installment amount

then, nPVA x (Installment Amount + Additional Payment per Period)

Wherein,

  • FV is a future value of the balloon amountPV is the present value of Outstanding BalanceP is the PaymentP’ is the new Paymentr is the rate of interestn is the frequency of paymentsnPVA is the number of periodical payments

The Additional Payment Calculator is very useful to borrowers, especially when they plan to increase their installment amount to save on interest payments and pre-pay their loan early. This calculator shall help them identify how much they will save had they not made any additional payment. The borrower shall be able to determine whether his decision to make additional payment is worthwhile.

How to Use the Additional Payment Calculator?

One needs to follow the below steps to calculate the monthly installment amounts.

Step #1 – First, a borrower needs to determine the current loan outstanding balance, which is nothing but finding out the present value of the mortgage.

Step #2 – Now determine the new installment amount, which is the sum of the existing installment amount and the additional payment that the borrower things to make.

Step #3 – Use the nPVA formula to determine when the remaining loan will be paid off.

Step #4 – Multiply the nPVA calculated in step 3 by the new installment calculated in step 2.

Step #5 – Calculate the total value of the installment already paid by multiplying the existing installment by the number of periods for which the same has been paid.

 Step #6 – Take the sum of values arrived in steps four and step 5, which shall be the total outgo if additional payment is made.

Step #7 – Multiply the existing installment with a total number of periods.

Step #8 – Subtract Value arrived in step 7 by step 6, which shall yield the savings done by making additional payment.

Example

Mrs. Yen Wen has taken a mortgage loan for $200,000 for 30 years, and the rate of interest, which applies to the same, is 5%. Since she is an employee of the bank, she is eligible for a rebate on interest to the tune of 0.75%. Her monthly installment is $983.88 based on a current fixed rate. She would be eligible for promotion next year and expects a decent hike. She feels that she would be able to increase the monthly installment by $200, and she feels that she would be able to save a substantial amount of interest, and she would be able to close the loan earlier than the current. It has been four years since she has been paying the same monthly installment, and she has not defaulted on any of the installments.

Based on the given information, you are required to calculate the savings she would make on her mortgage loan and by what span she can expect to close the loan based on a new installment amount.

Note: You can ignore the time value of money since her additional payment starts from the end of year 5.

Solution:

We are given here; that the existing monthly installment she is paying is $983.88, which must be paid until 30 years. Hence, her total outgo would, if she continues to make the existing installment, will be $983.88 x 30 x 12, which is $354,196.72

Now, after five years, she wants to increase the monthly installment amount, which is $983.88 + $ 200, which equals $1,183.88.

We will now calculate what savings she shall make if this additional payment is made.

Rate of interest applicable on monthly basis = (5.00% – 0.75%) / 12 = 0.35%

The remaining period will be (30 * 12) – (5 * 12), which is 360 – 60, 300.

We need to calculate the present value of the current outstanding balance, which can be calculated per below formula:

  • = $983.88 * [1 – (1+0.35%)-300 / 0.35%]= $181,615.43

Now since we have the Present ValuePresent ValuePresent Value (PV) is the today’s value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation.read more of the outstanding loan balance at the end of 5 years, we need to Calculate the period within which the loan can be closed with the new installment amount.

  • = Ln [ {(1- 181,615.43 x (0.35%) / 1,183.88}-1] / Ln (1+0.35%)= 221.69

Now we shall calculate the total outgo with the new installment, which is

New installment * nPVA i.e. 1,183.88 * 221.69 which equals to $262,454.13 and amount that is already paid which is $983.88 x 60 which is $59,032.80, and therefore the total amount paid under additional payment installment shall be $262,454.13 + $59,032.80 which is equal to $321,486.93

Therefore, savings on this additional payment will be $354,196.72 less $321,486.93 which is $32,709.87.

The number of loan payment periods shall be reduced by 300 – 221.69, equal to 78.31 months, and in years it is six years and six months.

Conclusion

The additional payment calculator, as discussed, is useful for the borrower to calculate the savings he can make by repaying the loan earlier, that is, through an additional amount added in every installment. This shall help save the interest and reduce the loan term.

This has been a guide to the additional payment calculator. Here we discuss how to calculate the additional payment of loans to know the savings along with step-by-step examples. You may also take a look at the following useful articles –

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