How Payoff Date and Interest Are Calculated
Each month your lender charges interest on the balance you still owe: balance × annual rate ÷ 12. Your payment covers that interest first, and whatever is left reduces the principal. Next month's interest is then charged on the smaller balance.
Example: $300,000 at 6.75%, with a $1,946 monthly payment.
- Month 1 interest: $300,000 × 0.0675 ÷ 12 = $1,687.50
- Principal paid: $1,946 − $1,687.50 = $258.50
- New balance: $299,741.50
Add $200 extra and the full $200 goes to principal, because the interest is already covered. That $200 never collects interest again. You save interest on it every month until the loan is paid off, so extra payments made early save the most.
The regular payment comes from the standard amortization formula, M = P × r ÷ (1 − (1 + r)−n), where r is the monthly rate and n is the number of payments. For $300,000 at 6.75% over 360 months, that gives $1,945.79.
How to Find Your Own Payoff Date
If you know your balance (P), monthly rate (r = annual rate ÷ 12), and the total you pay each month (M), the number of months left is:
n = −log(1 − r × P ÷ M) ÷ log(1 + r)
Worked example: P = $300,000, r = 0.0675 ÷ 12 = 0.005625, M = $1,946 + $200 = $2,146.
- r × P ÷ M = 0.005625 × 300,000 ÷ 2,146 = 0.7864
- n = −log(0.2136) ÷ log(1.005625) ≈ 275.2 months
Round up to 276: 275 full payments plus a smaller final one. That's 23 years instead of 30. The formula assumes the same payment every month. With lump sums or changing amounts you have to go month by month, which is what our Loan Payoff Calculator does for you.
The formula applies to any fixed-rate installment loan. A $20,000 personal loan at 9% with $400 payments takes 63 months (about $5,161 in interest). Adding $100/month cuts that to 48 months and $3,868, saving 15 months and about $1,300.
Savings by Extra Monthly Amount
$300,000 at 6.75%, $1,946/month. With no extra payments the loan takes 360 payments and costs about $400,300 in interest.
| Extra / Month | Payments | Payoff Time | Time Saved | Interest Saved |
|---|---|---|---|---|
| $0 | 360 | 30 yr | — | — |
| $50 | 333 | 27 yr 9 mo | 2 yr 3 mo | ~$35,900 |
| $100 | 311 | 25 yr 11 mo | 4 yr 1 mo | ~$65,000 |
| $200 | 276 | 23 yr | 7 yr | ~$109,800 |
| $300 | 249 | 20 yr 9 mo | 9 yr 3 mo | ~$143,100 |
| $500 | 209 | 17 yr 5 mo | 12 yr 7 mo | ~$189,700 |
| $1,000 | 152 | 12 yr 8 mo | 17 yr 4 mo | ~$253,600 |
Each additional $100 saves less than the one before. The first $100 cuts about 4 years, while going from $400 to $500 cuts much less. That's because you're shortening a loan that's already shorter.
Lump Sum vs. Monthly Extra
Timing matters as much as the amount. The same $10,000 saves far more in year 1 than in year 20:
| Strategy | Total Extra Paid | Interest Saved | Time Saved |
|---|---|---|---|
| $10,000 lump sum, year 1 | $10,000 | ~$58,000 | 2 yr 11 mo |
| $10,000 lump sum, year 10 | $10,000 | ~$28,700 | 1 yr 8 mo |
| $10,000 lump sum, year 15 | $10,000 | ~$18,100 | 1 yr 2 mo |
| $10,000 lump sum, year 20 | $10,000 | ~$10,300 | 10 mo |
| $200/month from month 1 | $55,200 | ~$109,800 | 7 yr |
Per dollar, an early lump sum is the most efficient: $10,000 in year 1 saves about $5.80 of interest for each dollar paid. A steady monthly extra saves more in total because you put in more money over time. One extra full payment per year ($1,946 each year, the same as biweekly payments) pays the loan off about 5 years 10 months sooner and saves about $91,000.
Payoff Amount vs. Current Balance
When you're ready to pay off the loan completely, the balance on your statement isn't the amount you'll owe. Interest builds up daily between payments, so your payoff amount is the principal plus interest through the day the money arrives. On a $250,000 balance at 6.75%, that's about $46 per day ($250,000 × 0.0675 ÷ 365). Ask your servicer for a written payoff quote good through a specific date before you send the final payment.
Assumptions Behind These Numbers
- Fixed rate, interest charged monthly, and every extra dollar applied to principal in the month it's paid
- Principal and interest only. Taxes, insurance, and PMI in escrow don't affect the payoff math
- No prepayment penalty
Deciding whether to prepay, and which approach to use (biweekly, recasting, refinancing to a shorter term), is a separate question. Our guide on how to pay off your mortgage early covers the strategies and when to skip prepaying.