(i) I have an [tag]interest-only home equity loan[/tag] of $124,000 at 8% interest rate. I want to pay it off. If I repay $1,800 each month, when will I pay off the loan?

(iii) Currently my interest-only payment is just over $800 a month. If I repay $1,000 principal every month, will I be better or worse off?


(i) You will pay off the entire loan in 93 months. The final repayment installment is $960.

(ii) You will have paid $42,560 interest in total.

I have set out the numbers for you under Scenario 1 in this spreadsheet. Be sure to scroll down to the bottom of Scenario 1 to see the summarized figures.

(iii) Repaying $1,000 principal every month

(a) It will not make a difference if you repay $1,800 every month

If you pay $1,800 every month, the results will be answers (i) and (ii). There will not be any changes in the results. The monthly interest will be paid off first from your $1,800 monthly installment, and then whatever amount of money left of the $1,800 is used towards repaying the principal.

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Scenario 1 shows the monthly interest and principal paid. Go back to Scenario 1, and you will see that in month 1 $827 interest is paid, while $973 principal is paid. In month 2 $820 and $980 interest and principal are paid respectively. Each month’s interest and principal paid add up to $1,800. This is how your monthly installment is apportioned between interest payment and principal payment.

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In Scenario 1 you may have already noticed that in each successive month the principal paid increases while the interest paid decreases. You can see that after month 5 the principal paid each month exceeds $1,000.

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(b) You will end up paying more interest if you stipulate $1,000 monthly principal repayment
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If you agree with your lender that you will pay $1,000 principal each month, you will repay your loan according to the [tag]loan repayment schedule[/tag] shown under Scenario 2 . You will be worse off as follows:

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(1) You will fully pay off your loan in 124 months vis-a-vis 93 months in Scenario 1. This is because you pay off the outstanding principal at a slower rate in Scenario 2, thus stretching the loan period.

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(2) Your monthly repayment installments will no longer be constant: they decrease in each successive period. You will have to pay $1,826.67 in month 1, $1,820 in month 2, $1,813.33 in month 3, and so on (see Scenario 2 “Repay” column). This may cause you some inconvenience in administering your monthly repayments.

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(3) You will have paid $9,106.67 more interest at the end of the loan period. Scroll down to the bottom of Scenario 2 to see the summarized figures.

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