Calculate Mortgage Payment Refinance
Q: I have been using a system recommended by "ERA Answers", a publication for home buyers put out by ERA Real Estate, to pay off my mortgage early. For a 30 year mortgage, the book says to
pay the regular P&I payment the first year the 2nd year you pay the P&I payment + 3% the 3rd year you pay the ( P&I payment + 3%) + 3% and so on
Supposedly, your 30 year mortgage is paid off in "about 1/2 the time". The trouble is, I have no idea how to actually calculate this out to see the payoff schedule. I don't want to get to the 14th year and see that it looks like there are really 3 or 4 more years to go. If the "system" works, my 30 year mortgage that I got in 1997 should be paid off in 2012, or about 10.5 years from now.
Also, we're probably going to refinance to a 15-year mortgage at a lower interest rate. I'd like to go on an accelerated payment plan with the new mortgage and am thinking that for the ERA system to work, I'll have to add 6% more per year instead of 3%. In any event, I'd like more new mortgage to be paid off by at least 2012.
Does anyone have a clue how to do this math?
A: If you have access to a spreadsheet, that should make short work of the math. Given the formula you got from ERA, and assuming a 7.5% interest rate , I figure the mortgage paid off in 211 payments, or 17 years, 7 months. Over that time, your payment will escalate from $6.99 per $1000 to $11.56 per $1000, because of the compounding 3%/year increase. The payoff date is sensitive to your interest rate and the escalation percentage, so it will vary by a number of months for slightly different rates. The escalating formula is worth considering if you are willing to bet on your income being higher in future years, but it is an approximation only, and you cannot predict when it will pay off your loan without doing the detail work. If you dislike the escalating payments of this formula, or want a date certain on which your mortgage will be paid off, use the payment formula in any spreadsheet, financial calculator, or book of compound interest tables. Figure the difference between the payment this gives you and the principal and interest payment on your mortgage, then make an additional principal payment of the difference each time. This is simple and gives you both a fixed payoff date and a fixed amount to add to your payment each month. .
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