My normal monthly payment is $1,699.71.Step 2: Figuring out what my enhanced payment will be Every month, I want to pay an extra 1/12 of my normal payment. $1,699.71 ÷ 12 = $141.64. So my enhanced payment is $1,699.71 + $141.64 = $1,841.35 Step 3: Figuring out how long it will take to pay off with the enhanced payment N: (This is what I'm trying to find) I/YR: 11.25 (The interest rate on the loan is 11.25%) PV: 175,000 (I borrowed $175,000) PMT: -1,841.35 (My enhanced payment is $1,841.35) FV: 0 (I want to know how long it'll take to fully pay off the loan)
Using the enhanced payment, the loan will be paid off after 237.51 months (19.79 years).Step 4: Figuring out how much I pay overall with my normal payments If I make normal payments, then I pay 360 payments of $1,699.71, meaning that I pay 360 x $1,699.71 = $611,894.67 overall. Recalling that I only borrowed $175,000, my sum-total payment of over $600,000 seems pretty high, and I can understand why any attempt to lower that to a more reasonable figure would be attractive. Step 5: Figuring out how much I pay overall with enhanced payments If I make enhanced payments, then I pay 237.51 payments of $1,841.35, meaning that I pay 237.51 x $1,841.35 = $437,346.11 overall I still only borrowed $175,000, but paying $437,000 is much better than paying $611,000 to be sure. Step 6: Figuring out how much I save with enhanced payments If I make enhanced payments, I pay $437,346.11, versus the $611,894.67 total from normal payments.
So making enhanced payments saves me $611,894.67 - $437,346.11 = $174,548.56. That's nearly the amount I borrowed in the first place!Conclusion Did you notice that this time, making the enhanced payment lopped more than 10 years off the total loan term? And that last time it was less than 5 years? Paying down loans quickly can save a lot of time and money, particularly when the interest rate on the loan is high!
What do you think? If interest rates were to once again reach the levels they did 35-40 years ago, would you find the 13-payments-per-year plan to be more attractive than you do today? Or do you like the concept, even on your 4% and 5% loans? Why or why not? Let us know in the comments!