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Incremental Borrowing Cost Calculation: Understanding Loan Differences

Calculating incremental borrowing costs allows you to find the true cost difference between loan terms.

Many lenders offer different mortgage terms based on the amount that the borrower pays down at the time of the loan. The terms often look attractive, requiring only .5 percent higher interest if the borrower chooses to pay only 10 percent down rather than 20 percent. While the difference in monthly payments tends to be fairly low, the borrower must pay that difference over the entire term of the loan. Even if the difference in interest rate is only half a percentage point, the cost of borrowing the extra increment is often significantly higher. Calculating the incremental borrowing cost allows you to weigh your financing options more clearly.

Step 1

Compare the payment tables for the two illustrations. Find the difference in borrowed amount by subtracting the lesser borrowed amount from the higher borrowed amount listed on the illustrations.

Step 2

Subtract the monthly payment of the lesser loan from that of the larger loan. Record how much more per month you would pay for borrowing the extra increment.

Step 3

Convert the term of the loan into the number of months. Multiply the number of years in the term by 12.

Step 4

Press the "PV" button on your financial calculator. Enter the difference in borrowed amounts.

Step 5

Press the "PMT" button on the financial calculator. Enter how much more per month you would pay for borrowing the extra increment.

Step 6

Press the "n" button. Enter the term of the loan in the total number of months.

Step 7

Press the "PV" button and enter 0 to find the incremental borrowing cost over the entire loan. Press the "PT" button followed by the "I" button to calculate the incremental borrowing cost as a percentage.