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Loan Payment Formula:
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The home loan payment formula calculates the fixed monthly payment required to fully amortize a loan over its term. The formula accounts for compound interest and allows for additional monthly prepayments to reduce the loan term and total interest paid.
The calculator uses the standard loan payment formula:
Where:
With prepayments: The calculator then simulates each month's payment, applying the additional prepayment amount directly to principal, which reduces subsequent interest calculations and shortens the loan term.
Details: Even small additional monthly payments can significantly reduce total interest paid and shorten the loan term. Understanding these impacts helps borrowers make informed decisions about prepayment strategies.
Tips: Enter the loan principal, annual interest rate, loan term in years, and optional monthly prepayment amount. All values must be positive numbers.
Q1: How much can I save with prepayments?
A: Savings depend on loan amount, interest rate, and prepayment amount. Even $50-100 extra per month can save thousands in interest and shorten the loan by years.
Q2: Are there prepayment penalties?
A: Some loans have prepayment penalties, especially in early years. Check your loan terms before making extra payments.
Q3: Should I prepay or invest extra money?
A: Compare your loan interest rate with potential investment returns. Paying down high-interest debt often provides better guaranteed returns.
Q4: Does prepayment affect amortization?
A: Yes, prepayments accelerate principal reduction, changing the amortization schedule to pay less interest over time.
Q5: What's better - lump sum or monthly prepayments?
A: Monthly prepayments provide consistent benefit, but lump sums (when possible) provide immediate principal reduction. Both strategies are effective.