Home /
Money Blog
How much interest can I save by paying off my mortgage?
Note: You can use any financial calculator to do this problem, but if you want the BEST, you can
get our
10bii
Financial Calculator for iOS, Android, Mac, and Windows!
THE SCENARIO
Several years ago I borrowed some money to buy a condo. Today, still owe $66,924.65 on this mortgage, with payments of $352.16 per month, at a rate of 3.875%.
If I suddenly came into a pile of money and decided to pay off this mortgage today, how much interest would I avoid paying over the remaining life of the mortgage by doing so?
For simplicity, assume that there's no partial-month interest to satisfy and no pre-payment penalties involved.
THE SOLUTION
This problem is a three-stepper.
- The first thing we need to do is figure out how many payments are left on the mortgage.
- Then we need to figure out how much the total payments over that number of months would have been.
- Then we need to subtract the amount I'd pay today to satisfy the mortgage from the total payments I'd make if I didn't pay off the mortgage today.
Let's get to it.
Step 1:
First things first, make sure the calculator is using 12 Payments per Year.
N: (this is what I'm trying to find)
I/YR: 3.875
PV: 66,924.65
PMT: -352.16
FV: 0
When I plug these numbers into the calculator, I find that I have 295 payments left to make on this mortgage.
Step 2:
If I paid off the mortgage today, I'd avoid 295 payments, each of which is $352.16.
295 months times $352.16 per month is $103,887.20 I can avoid paying over the next 25ish years by paying $66,924.65 today.
Step 3:
I owe $66,924.65 which means any amount I pay above that is interest on the loan. My payments will add up to $103,887.20 so the amount of interest I'll be paying on the loan over time will be $103,887.20 - $66,924.65 which is a total of
$36,962.55. If I pay off the loan now, I'll save
$36,962.55 in interest over time.
Note that doing this problem doesn’t tell me whether it’s a
good idea to pay off the mortgage today, it just tells me how much interest I’d save if I decided to do so.
