Prepayment Penalty Calculator

What is a Prepayment Penalty Calculator?

A Prepayment Penalty Calculator is a financial tool that helps borrowers estimate the penalty they might incur if they pay off their mortgage early. This penalty is typically a percentage of the remaining loan balance or a certain number of months' worth of interest.

Formula for Prepayment Penalty Calculation

The formula for calculating the prepayment penalty on a mortgage is:

\[B = \frac{P \times r \times (1 + r)^n}{(1 + r)^n - 1} \times \frac{1}{2}\]

Where:

• B = Bimonthly Payment
• P = Principal Loan Amount
• r = Monthly Interest Rate (Annual Rate / 12)
• n = Total Number of Bimonthly Payments (Loan Term in Years × 24)

Calculation Steps

1. Calculate the monthly interest rate by dividing the annual rate by 12.
2. Determine the total number of bimonthly payments by multiplying the loan term in years by 24.
3. Apply the formula to calculate the bimonthly payment.
4. Calculate the total interest paid by multiplying the bimonthly payment by the number of payments and subtracting the original loan amount.

Example

Let's consider a scenario with the following details:

• Loan Amount: $250,000
• Interest Rate: 4% per year
• Loan Term: 30 years

Calculation:

1. Monthly interest rate: 4% / 12 = 0.3333%
2. Number of bimonthly payments: 30 × 24 = 720
3. Bimonthly payment: $596.44
4. Total interest paid: $179,434.80

In this example, the borrower would pay $596.44 bimonthly. Over the 30-year term, they would pay a total of $429,434.80, of which $179,434.80 is interest. This bimonthly payment schedule can result in significant savings compared to a traditional monthly payment plan.