To calculate interest for early mortgage repayment, use the simple interest formula or an amortization schedule. The simple interest method is:

ext{Interest Saved} =

ext{Principal}

imes

ext{Annual Interest Rate}

imes frac{

ext{Remaining Term in Years}}{12} ]

For example, a $200,000 loan at 4% interest with 5 years remaining:

ext{Interest Saved} = 200,000

imes 0.04

imes frac{5}{12} = $3,333.33 ]

Alternatively, an amortization schedule breaks down each payment’s interest and principal components. Extra principal payments reduce future interest. Lenders may prorate interest if prepayments occur mid-cycle.

The primary reason to calculate interest for early repayment is to quantify long-term savings by reducing the principal faster. Data from the Consumer Financial Protection Bureau (CFPB) shows that prepaying 1% of the mortgage balance annually can save approximately $30,000 in interest over 30 years at 5% interest. The Federal Reserve reports that the average 30-year fixed mortgage rate in 2023 was 7.14%, making early repayment particularly impactful. For instance, a $300,000 loan at 7.14% with 20 years remaining would save ~$56,000 in interest if repaid early, as the interest portion of each payment decreases with a lower principal. Lenders typically apply prepayments to principal first, accelerating interest deductions. However, some institutions charge prepayment penalties, so verifying terms is critical. Using online calculators or spreadsheet amortization tools ensures accuracy, as manual calculations risk errors in compounding or payment schedules.