Which loan type is cheapest?

Question

I have a 4% loan that spans 20 years, where I pay a fixed amount every three months.

If I make an extra payment, I then can choose between two options

• keep the duration of the loan constant, and I pay less every 3 months

or

• the duration of the loan is shortened and I pay the same amount every 3 months that I always have.

Question

How do I calculate which option that is the over all cheapest?

Answer 1

The second option will be cheaper in terms of interest paid, as you have money borrowed for less time. You can check this by making a spreadsheet and doing the amortization table. Each three months, you add 1% interest then deduct the payment. Excel (and I believe other spreadsheets) has a PMT function that will find the new payment on the loan so it comes out even.