Lump Sum

How Does Applying a Lump Sum to my Mortgage affect things?

A commonly asked question is what is the affect to a mortgage when a lump sum is applied sometime during the course of a mortgage.

Lets take an example of a mortgage of $100,000.00 at 6% per annum, compounded monthly, and amortized over a period of 15 years (180 months). The monthly payment calculates to $843.86. If the mortgagor makes all of his payments, without a lump sum, the total paid to the mortgagee, then, is $151,894.80 (calculated as 180 payments times 843.86). $100,000.00 of that is the amount he borrowed, and the rest ($51,894.80) is interest.

Now lets assume that this mortgagor makes an additional principal payment of $10,000.00 at 5 years into the mortgage. His balance after 60 payments, and before the $10,000.00 lump sum payment is $76,008.87 ($66,008.87 after the lump sum payment). The monthly payment of $843.86 remains unchanged, and the amortization shows that it will then take an additional 99.5 months to pay the mortgage down to zero.

Okay, so he now is paid off after a total of 159.5 months (99.5 plus 60), instead of the original 180 months. This saves him from making 20.5 payments, or $17,299.13 (843.86 times 20.5). Of course, he paid the $10,000.00 additional on the mortgage after 60 months, so his net savings is $7,299.13, all of which is interest.

Confusing? Maybe, but the end result of paying $10,000.00 additional on that mortgage, after 60 months, saves the borrower $7,300.00 in interest. Not bad.