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- Student Loans – Getting to "Paid in Full"
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## Student Loans – Getting to "Paid in Full"

In 1969, in her book Death and Dying, Elisabeth Kubler-Ross introduced five stages of grief: denial, anger, bargaining, depression, and acceptance. If you have a large student loan balance, you’ve probably experienced “grief” and you’re no stranger to these five stages. If you are in the “adoption” stage, this article is for you!

Being in the receiving stage is a good place to be. This means that: you’ve discovered that procrastination and tolerance don’t last forever (the denial stage), you’ve stopped blaming others for getting what you considered a “free ride” (the anger stage), you’ve learned that you can’t get your release obligations. a loan through bankruptcy (negotiation stage), you’ve stopped drinking and watching reruns of Gilmore Girls (depression stage), and now you’re accepting financial responsibility and ready to do something about it. You won’t find any “magic bullets” in this article, but you will find an effective strategy to repay your loan in the shortest possible time.

Step 1 – Organize the loan in a spreadsheet

To better manage your student loans, you need to fully understand what you’re up against. Creating a spreadsheet will give you an overview of how the loan works and show you the positive results of additional principal payments. To create a functional spreadsheet, you need to understand your loan terms and know how to organize that information into a spreadsheet. If you’re not a spreadsheet user, you’ll find it easy to learn the basics.

To start the spreadsheet, you’ll need the following information about your loan: current balance, interest rate, payment amount, and how interest is calculated. It allows you to create an interactive spreadsheet that calculates how much interest accrues per day and gives you a daily balance.

The way interest is calculated may need some digging. You can find this information by reviewing your loan documents, visiting the lender’s website, or calling the lender’s customer service number. The number of days used to calculate the loan interest is called the base. For example, when calculating a mortgage, 30/360 is usually used, which means that 360 days are assumed in a year and 30 days in a month. So when you make a mortgage payment, your interest is based on 30 days. Student loans typically use the actual number of days in a month and year with 365 days (actual/365). Some loans may use the actual/365.25 practice; every loan is different. On a real/365-based loan, you pay less interest in a short month (less than 31 days) than in a 31-day month.

Still feeling lost? Don’t worry because when we put it all together it makes sense. I’ll also explain how to test the spreadsheet to make sure it’s working properly. The initial setup of the spreadsheet is the most difficult step.

At the top of the spreadsheet, enter basic information about your loan, such as: opening balance, interest rate, monthly payment, due date, and interest rate factor. The interest rate factor is the interest rate divided by the number of days in a year. Again, each lender and loan type is different in how many days per year are used. The informative part of the spreadsheet is important because you want to clearly see the variables that affect your loan.

After entering the basic information, you can start building the interactive spreadsheet. Your goal is to create a spreadsheet that shows when each payment is posted, how much of each payment is applied to principal and interest, and what the ending (or current) balance is. The column names you create are (from left to right): Payment Date, Principal, Interest, and New Balance. Below is a more detailed explanation of these columns:

• Payment Date – This is the date your payment is actually credited to your account. This is critical because your student loan interest rate will likely be based on the actual number of days between payments.

• Principal – This is a formula that equals your payment amount minus the interest portion of your monthly payment. This is the portion of your payment that is applied to reduce your balance.

• Interest – You need to know how your lender calculates the interest on your loan. This is usually based on the actual number of days multiplied by the previous month’s balance plus an interest factor. Your Excel formula is: (current payment date minus previous payment date) x previous month’s balance x interest factor.

• New Balance – This is equal to your previous month’s balance minus the principal on your current payment.

If your lender has a website that allows you to view information about your loan and/or make payments, set up online access now. Print your loan balance history and start creating a spreadsheet using the first payment as a starting point. The balance history should show how much of each payment was applied to principal and interest. This way you can test your spreadsheet to make sure it works properly. Check if your formula results match the website history. If they don’t match, you’ll need to troubleshoot to find out why. It could be that the lender made a mistake, but more than likely the error is in your spreadsheet. If you have a friend or family member who is an Excel user, see if they can help you. The web is also a great resource.

The real power of a spreadsheet is that you can easily simulate what-if scenarios. For example, suppose you receive a large unexpected sum of money. You can plug that number into your spreadsheet and easily see what the results of such a large deposit would be. You may find that if you made this additional principal reduction payment, your loan would be repaid in ten years instead of 15 years. This can be very motivating for you. If you don’t have a tool like a spreadsheet to generate this type of information, you can do something else with your money.

Step 2 – Strategies to Accelerate Payouts

Congratulations on creating a spreadsheet to track your student loan balance and payments. Monitoring your loan in this way gives you control over your loan. Getting a statement in the mail every month and not really understanding why your balance moved so little is not motivating and adds to the feeling of hopelessness (and you really don’t want to go back to cheap beer and Gilmore Girls reruns). Here are some specific strategies to help you pay off your loan quickly:

Pay a little more each month – we’ve all heard it before, especially when it comes to mortgages. Well, the same goes for student loans. When you make a monthly payment, part of that payment is applied to interest and the rest to principal. My suggestion: Pay the extra principal amount, which will result in two zeros at the end of your loan balance. For example, if your balance is $37,845.21 after you make your next payment, pay an additional $45.21 to bring your principal balance to $37,800. Getting a loan even for a hundred dollars is a strategy that encourages you to pay more each month.

To facilitate this strategy, I recommend that you pay your loan electronically. You have no control over when your payment is mailed. When you make an online payment, you usually select a date for the payment to be posted. In addition, there will probably be a section where you enter an additional amount to the principal amount due.

The advantage of paying more than the minimum payment is that when you make the next loan payment, a larger portion will be applied to the principal and a smaller portion to the interest (compared to if you did not pay more the previous month). If you continue to pay more than the minimum amount, this effect will add up each month. The result is that you pay back your loan significantly faster than if you were only making the minimum payment. This is because as your balance goes down, the amount of interest you pay goes down. More of each payment is applied to reduce principal. This effect is easy to see when you track it in a spreadsheet, making it an effective strategy.

Make a plan to pay “more” regularly – if you get a tax refund each year, apply it to your student loan balance. This has a huge impact on the speed at which you repay your loan. If you get a bonus every year, apply it too. Any windfall or “found money” should be used to reduce your balance. It’s not uncommon for people to have different attitudes toward “found money.” “Found money” is often wasted on “splurge” things. Resist that urge! Use extra money to pay off your student loan balance, no matter where or how you got it!

In summary, the necessary steps to pay off the loan faster are as follows:

1) Use a spreadsheet to track your loan so you can see how much of each payment goes toward principal and interest. Create what-if scenarios so you can see the impact of repaying the loan and strategize for it.

2) Pay a little more every month. One strategy is to pay the extra amount so that your balance is even by $100.

3) Commit to making large payments if you have a cash windfall, such as a tax refund or bonus. While this may not yield an immediate reward, the long-term consequences are significant. Time really does fly and what may seem like a huge balance right now can be brought to zero in a lot less time than you think, but only if you make it a priority and a goal.

Paying off student loans can seem overwhelming. However, if you use the strategies presented here, you will find yourself succeeding faster than you ever imagined. You can apply these same ideas to your mortgage and other loans. Gaining control over your finances is empowering. And by the way, I started this article with a reference to the five stages of grief. If you die, know that in most cases, your loan dies with you—unless you’ve consolidated with your spouse. In this case, unfortunately, the loan lives on!

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