# Overview

#### Main Menu Name: **Double**

Calculates the effect of increasing each monthly mortgage payment by the amount of principal owed that month. The "Double Payment" is not twice the entire mortgage payment but twice the principal payment plus the interest payment.

### In this article:

# Background

Managing installment debt is one of the most complex elements of personal financial planning. Consumer borrowing, from the wise use of credit cards to installment loans, to a home mortgage, plays a significant role in the financial affairs of almost every individual or family. For younger persons it can be more crucial than any investment decisions they might make.

Despite this importance, however, most consumers do not focus enough attention or analysis on their borrowing decisions. Most borrowers simply "shop their loan" for the lowest available rate and generally accept the terms offered by their local lending institutions. Consumers also tend to be somewhat shortsighted in looking for the lowest monthly payment rather than examining the overall cost of the financing.

Even after a loan agreement or mortgage has been put in place, the borrower may benefit enormously by paying more than the regular payment amount. Most installment and mortgage loans allow advance payments or prepayments to be made without any penalty.

One common approach to paying off a home mortgage is to pay double the amount of principal that is due with each payment. This is generally not too burdensome for borrowers during the early periods of the loan since the amount of principal paid with each payment is quite small. It may become more challenging toward the end of the loan period when the principal portion of each payment grows rapidly.

The result of this technique is to effectively cut the borrowing period in half with a corresponding reduction in the interest cost of the loan. The default case shown in the program is for a 30-year, $100,000 mortgage at an interest rate of 7%. If the borrower were to make the standard 360 monthly payments of $665.30 each, interest costs of $139,510.98 would be added to the original principal of $100,000 for a total repayment of $239,510.98. However, if the borrower, each month, were to pay the principal and interest due for that month, plus the principal due for the next month, the overall results would be quite different. Using this technique, the loan would be repaid in 15 years rather than 30, and the total interest cost would be $69,900.87 instead of $139,510.98. Thus, there would be an interest savings of $69,610.11.

Should an individual adopt this technique? The answer will depend on a number of considerations both current and future. Among these are current income, expected future income growth, tax considerations (future interest deductions will be reduced), and other investment opportunities. There may also be an emotional benefit from paying off a mortgage in a shorter period of time. Financial planners should discuss all of these factors with their clients in order to help them make the most effective borrowing decisions.

# Why should I use this calculator?

- To measure the impact of increasing a loan payment in order to reducing the overall number of payments and the interest cost of the loan.
- To compare alternative loan proposals based on their interest cost and length of repayment period.
- To determine when a mortgage loan will be paid off under different payment assumptions.

# Getting Started

Managing installment debt is one of the most complex elements of personal financial planning. Consumer borrowing, from the wise use of credit cards to installment loans, to a home mortgage, plays a significant role in the financial affairs of almost every individual or family. For younger persons it can be more crucial than any investment decisions they might make.

Despite this importance, however, most consumers do not focus enough attention or analysis on their borrowing decisions. Most borrowers simply "shop their loan" for the lowest available rate and generally accept the terms offered by their local lending institutions. Consumers also tend to be somewhat shortsighted in looking for the lowest monthly payment rather than examining the overall cost of the financing.

Even after a loan agreement or mortgage has been put in place, the borrower may benefit enormously by paying more than the regular payment amount. Most installment and mortgage loans allow advance payments or prepayments to be made without any penalty.

One common approach to paying off a home mortgage is to pay double the amount of principal that is due with each payment. This is generally not too burdensome for borrowers during the early periods of the loan since the amount of principal paid with each payment is quite small. It may become more challenging toward the end of the loan period when the principal portion of each payment grows rapidly.

The result of this technique is to effectively cut the borrowing period in half with a corresponding reduction in the interest cost of the loan. The default case shown in the program is for a 30-year,$100,000 mortgage at an interest rate of 7%. If the borrower were to make the standard 360 monthly payments of $665.30 each, interest costs of $139,510.98 would be added to the original principal of$100,000 for a total repayment of $239,510.98. However, if the borrower, each month, were to pay the principal and interest due for that month, plus the principal due for the next month, the overall results would be quite different. Using this technique, the loan would be repaid in 15 years rather than 30, and the total interest cost would be $69,900.87 instead of $139,510.98. Thus, there would be an interest savings of $69,610.11.

Should an individual adopt this technique? The answer will depend on a number of considerations both current and future. Among these are current income, expected future income growth, tax considerations(future interest deductions will be reduced), and other investment opportunities. There may also be an emotional benefit from paying off a mortgage in a shorter period of time. Financial planners should discuss all of these factors with their clients in order to help them make the most effective borrowing decisions.

# Entering Data

**Original Loan Amount:**Enter the original amount of the loan.**Loan Interest Rate:**Enter the interest rate on the loan.**Term of Loan (years):**Enter the number of years given to repay the loan.**Annual or Monthly Return?:**Select to view an Annual report or Monthly report. The reports can be viewed by clicking the Single Schedule tab or the Double Schedule tab.**Monthly Report for Year:**This entry field only appears when you choose to view a Monthly Report. Enter any year in the repayment period to view the activity for each individual month.

# Results

The program calculates the regular monthly payment on the mortgage, assuming it is paid off over the full original term of the loan.

**Single Schedule: ** This schedule shows how the mortgage is paid off over the full original term of the loan. The schedule can be viewed in years or in months. Both modes calculate the total payments, the interest portion of the payments, the amount of principal repaid, and the remaining balance.

**Double Schedule: ** This schedule shows how doubling the amount of principal that is due with each payment pays off the mortgage sooner than regular payments. The program creates a table that can be viewed in years on in months. Both modes calculate the total payments, the interest portion of the payments, the amount of principal repaid, and the remaining balance.

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