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Using a Mortgage Prepayment Calculator

A mortgage prepayment calculator is a useful tool that estimates how much interest you could save by making extra payments on your home loan. It uses your current rate, payment frequency and amortization schedule to assess the impact of making one extra payment, multiple one-time payments or a combination of them.

Paying A Little Bit Extra Every Month versus a Large One-Time Payment
No matter how long you have lived in your home, there may be times when extra cash is necessary. For instance, you could receive a lump sum that allows you to pay off part of your mortgage early or invest other savings into improving the property value.

With a mortgage, you typically agree to make regular monthly payments for an agreed upon period of time – often 15 or 30 years – known as your “term.” During this term, payments toward principal decrease over time as regular payments are made.

With time, the outstanding principal on your mortgage becomes smaller and less costly to service. This could be because the value of your home has appreciated significantly or because you have made regular, consistent payments over time and built up equity in the property.

Making extra mortgage payments can be done for several reasons – to expedite loan payoff and reduce monthly payments. However, it’s essential to weigh other factors before agreeing to such commitments.

Additionally, if you have other debts such as high-interest credit card bills, private student loans or car loan balances, they should also be taken into consideration before prepaying your mortgage. These can be more challenging to pay off early due to lower interest rates or shorter repayment terms with higher monthly payments.

If you find yourself in this predicament, it would be wise to prioritize other debt and save for retirement before making an additional mortgage payment. You can do this by investing in tax-advantaged accounts like an IRA, Roth IRA or 401k which provide higher returns and significant tax savings.

Another consideration is that when you make an extra mortgage payment, the amount of your loan balance is reduced. This means future interest payments will also be lower. This creates a cascading effect and accelerates loan payoff.

Calculating Your Mortgage Prepayment with a Prepayment Calculator
If your fixed-rate loan has an extended term, making one-time or series of one-time payments can directly reduce the balance on your mortgage by the amount equal to that amount. This reduction in balance is known as a “prepayment.”

Prepayments are deducted from your loan principal, decreasing the total interest you’ll need to pay over its life. This results in a faster payoff period – you’ll finish paying off your loan much sooner than otherwise.

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