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Amortization Formula with Extra Payments:
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Amortization is the process of spreading out a loan into fixed payments over time. Each payment covers both principal and interest, with the interest portion decreasing over time while the principal portion increases.
Extra payments are applied directly to the principal, reducing the total interest paid and potentially shortening the loan term significantly.
Explanation: Each extra payment reduces the principal faster, which then reduces the amount of interest charged in subsequent periods.
Details: Financial expert Dave Ramsey advocates for aggressive debt repayment using the "debt snowball" method, where extra payments are prioritized to pay off debts from smallest to largest.
Tips: Enter the loan amount, interest rate, term, and any additional monthly payment you plan to make. The calculator will show your savings in both time and money.
Q1: How much can I save with extra payments?
A: Even small extra payments can save thousands in interest and cut years off your loan. For example, $100 extra on a $200,000 mortgage at 4% can save ~$30,000 and 5 years.
Q2: Should I refinance or make extra payments?
A: If your rate is high, refinancing might help. If your rate is low, extra payments often provide better returns than other investments.
Q3: When is the best time to make extra payments?
A: The earlier you start, the more you save. But extra payments always help, even late in the loan term.
Q4: How do I specify extra payments go to principal?
A: Most lenders allow this option - check with yours. Some may require writing "Principal Only" on the check.
Q5: Are there prepayment penalties?
A: Most modern loans don't have them, but check your loan documents to be sure.