Calculating interest after make a lump-sum payment to a mortgage

It doesn't affect the payments in any way, at least not on a traditional mortgage. What it does do is shorten the term of the mortgage on the back end. That is assuming you made this lump sum payment as principal. If you didn't specify that it was for principal, then the lender would treat it as payments made in advance. In that case, you would not have any payments due for a while.

-john-

Here's a way to approximately (but a good approximation) find out what happens: (1) Get an amortization table for your mortgage from your bank or an on-line mortgage calculator or whatever. (2) Get your loan balance immediately after making the principal payment. (3) Look down the amortization table until you find the month where the balance in the table equals your new, post-lump-sum-payment balance. (4) That place in the table is essentially where you now are in your loan. The effect of a lump-sum-principal payment is move you "forward" in time to that spot.

To sorta give an example (**using made-up numbers**): Let's say you have a $300,000 30-year mortgage which ends in 2030 and have $290,000 left on it. You make a $50,000 principal payment, reducing your balance to $240,000. You look down your amortization table and find out that in March 2015 the table says there would be a $240,000 balance. Well, that's what your payment did -- in terms of the life of the loan, today is now March 2015, which means there are now only 15 years left on the loan, and the principal and interest portions of your next payment will be given by the table entries for March 2015, the principal and interest portions of the payment after that will be given by the table entries for April 2015, and so on.

Thanks, That simplifies my life somewhat. I somehow thought that since the principal was reduced the component parts of the payment would change, i.e. a greater portion of the payment would go toward the principal.

Thanks again, JW

While it doesn't effect the payment amount, it will slightly change the ratio of the principal to interest from then on. That is why the mortgage ends early--you have less principal outstanding, so the interest fees are less. But your payment will stay the same amount each month--the lending company is not going to re-amortize the loan. You will see no different in the payment, but the lender's computer will notice a small difference in the payment components.

-john-

This calculator does the trick:

Regards, Chris

Your monthly payments do not change.

Each payment you make consists of some principal and some interest. If you've made a big lump sum payment, then your outstanding balance has been diminished. Thus, the interest you owe each month becomes less - the difference between the interest you owe each month and the fixed payment you make - that's the amount of your monthly payment which is applied to principal.

Exactly.

Actually, if you get an annual statement from your mortgage company which breaks down how each of your monthly payments was applied to principal and interest, you'll note that each month - from the very first month of your mortgage onwards - each month, the proportion of principal and interest changes. Each month, when you pay some principal, your outstanding balance goes down, etc. etc. A lump sum principal payment just accelerates this.

Making a big lump sum payment as principal will not change your monthly fixed payment. But you will finish paying it off way sooner. *AND* - in the meantime, you will be paying less interest and more principal each month - this is important because you may have adjusted your withholding on the assumption that you'd be getting a huge tax deduction due to all that interest you are paying. If you pay your mortgage down substantially, you will be paying less interest each month and more principal each month - and principal payments are, of course, *not* deductible on your taxes.

That's pretty important, too...

What I need is a numerical way -- a formula or recipe -- that I can program. Given the remaining principal, along with the other parameters of the loan, how do you calculate the amount of principal and interest for the remaining payments after a lump-sum payment. I don't need a calculator I need some fomula that I use in a program I am writing for the general case. I searched over the net but come up with a lot of calculators but no where does it describe how it was done. Any help is appreciated.

JW

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Actually the calculator is of no use. I need the formula the calculator uses. I need this to write a program that creates a mortgage schedule that includes an arbitrary lump-sum(s) payment(s). Given the remaining principal, and the other parameters of the loan, how do I calculate the principal and interest portions of the future payments.

JW

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What I need is a numerical way -- a formula or recipe -- that I can program. Given the remaining principal, along with the other parameters of the loan, how do you calculate the amount of principal and interest for the remaining payments after a lump-sum payment. I'm writing a program that need to create a mortgage schedule which includes arbitrary lump-sum payments.

Thanks, JW

Each month, the interest is the principal times interest rate times amount of time. You need to compute it each month since it is a formula where the output of one step is the input of the next step.

For example, on a unit I own, the payment is $599.17 a month, and my interest rate is 5.375%. The balance is $104,366.07.

Interest = 104366.07 x .05375 x 30 / 360 = $467.48

My principal payment is $599.17 - 467.48 = $131.69

My new loan balance is $104,366.07 - $131.69 = $104,234.38

In real life, it gets much harder. Some loan companies base the calculations on the day they receive the payment rather than on the due date, which means that you have to know the specific date that all the payments are made on. Beyond that, many loans are interest only, and you have to know the future interest rates to compute the payments.

-john-

Do a search on line for annuity formulas. Or get a copy of a text book like "The Theory of Interest" by Stephen Kellison.

It's not a simple formula and the notation used to express it can't be written via my text email. This is particularly true if you intend to solve for the remaining number of payments after having made a lump sum payment toward the principal during the term of the loan. This latter formula involves ln(x).

The basic formula you need is the present value of an annuity payable at the end of the month(immediate or ordinary annuity) with a nominal annual interest rate convertible monthly.

Frank

calculator

schedule that

payments.

Its very simple, and John Weeks has already given the answer, but I will give it again just in case you missed it.

The amount of a monthly payment which is applied to interest is simply the amount of interest that accrued that month on the principal balance. So, the formula is:

(Annual interest rate/12)*(Principal balance) = Amount of payment applied to interest.

I have written a number of spreadsheets which show the monthly ratio of principal and interest over the life of a loan taking into account any number of lump sum payments. Create rows for:

1: principal balance 2: monthly payment amount 3: interest portion of payment 4: principal portion payment In a separate area of the spreadsheet make a single cell for the interest rate (call it A5).

Then make the first column for Month 1 (call it column B) B1: is the original principal balance B2: is the monthly payment amount;; B3: interest portion of payment = ($A$5/12)*B1; B4 = principal portion of payment = B2-B3.

Then make the second column for Month 2, column C C1: Principal balance = B1-B4; C2: Monthly payment amount; C3:($A$5/12)*C1; C4: C2-C3

Then copy column C out to month 360, or whatever is appropriate for the length of the loan. You should see that the principal balance goes to zero right on schedule, which is your assurance that the spreasheet is functioning properly. Then you can pop in lump sum payments in any month(s) you feel like, and you will instantly see what the new ratio of principal/interest is and also how much sooner the loan is paid off.

Andy

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calculator

schedule that

payments.

Here's an excel spreadsheet that you can extract the equations from:

Regards, Chris

Thanks to everyone in the group for your responses. You helped me a lot.

This is one of the best groups I have ever "hovered" over.

Thanks again,

JW