Extra mortgage principal payments


How can ESPlanner be used to model the impact of extra monthly principal payments for a home mortgage on living standard?


Dan Royer's picture

The way I do it is to use an amortization calculator (easy to find online) to calculate the time period that goes with the extra payments and just enter different payment information in the mortgage settings for the home. Then compare discretionary spending with what you had before.

Is this really equivalent to paying extra principal? If you make substantial extra payments, won't the interest paid each month be distributed differently, with implications for the tax deduction (i.e., depending on income level and AMT)?

Dan Royer's picture

ESPlanner calculates your mortgage rate given the payment data or alternative payment plan you enter and then does the standard compound interest thing to figure out how much of this year's payment is interest. After that the interest gets applied to the federal/state itemized deductions and off we go to the next year. So extra monthly principal payments reduce the overall term of the mortgage and thus save you money on the interest paid, but because you are lowering your principal and have less interest in the following years you'll thus save less on taxes because tax saving is related to interest paid. And you at some point may lose the ability to itemize if mortgage interest is what is pushing you past the standard deduction threshold. I'm not an accountant, but this is how I would understand it.