Purchasing your very own home is almost everyone’s dream. But, we also know that taking on the massive mortgage debt can prevent many of us from retiring earlier, paying our kids college education, or taking a vacation.
More than 26.9 million of American own a home. Some bought them with cash, whereas others took a mortgage and paid year after year until it ended. If you’re one of the latter group of people, you can be debt-free homeowners!
One way to pay off your mortgage earlier is by adding some extra amount to your monthly payments. But, the question is, just how much more should one pay? This is where the early mortgage pay-off calculator comes in to help you figure all of this out.
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Understand Your Mortgage Payment
A mortgage is a long-term loan that you will have to pay off within a number of years in monthly installments. Your mortgage payment is as both your principal and interest payment in a mortgage payoff calculator.
When you’re paying extra on your principal balance, you’re reducing the amount of your loan, and further saving money on the interest. But do be mindful that you may have to pay for some of the other costs on your monthly payment like property taxes, homeowners’ insurance, and private mortgage insurance (PMI).
Read on below to understand how a mortgage pay-off calculator works.
Early Mortgage Payoff Calculator
Are you wanting to pay off your mortgage earlier? Perhaps, you have 25 years remaining on your mortgage loan, but would rather pay it off in the next 16 years. The early mortgage payoff calculator easily demonstrates how you can reach your goal.
Early Mortgage Payoff Calculator: Bankrate
There is more than just one type of mortgage payoff calculator out there, but we felt Bankrate’s calculator was one of the simplest to understand. Here’s the breakdown of each value in the calculator:
- Annual interest rate: The annual interest rate is used to calculate the monthly payment of your mortgage loan. Do understand that this is not the Annual Percentage Rate (APR) that included any other expenses, which was paid at the time when the mortgage was originated. The APR is usually higher as compared to that of a simple interest rate.
- Original mortgage term: The original mortgage term is the total term of length of your origin mortgage loan in the number of years it has to be paid off. Usually it’s either 15 years or 30 years.
- Years remaining: Years remaining is the total number of years that you still have to pay the mortgage amount for.
- Original mortgage amount: The original mortgage amount is the original amount that was financed with your mortgage. You should not be confusing this with the principal balance or remaining balance.
- Additional principal payment: The additional principal payment is your proposed extra amount that you are willing to pay alongside your original monthly payment. This additional payment will reduce your principal balance.
- Current mortgage payment: The current mortgage payment consists of the interest payment (PI) and monthly principal based on the original mortgage amount, term and interest rate.
- Monthly accelerated payment: The monthly accelerated payment is the scheduled payment inclusive of the additional principal payment.
- Total savings: The total savings is the total amount that you will be saving in interest, if you continuously pad the accelerated payment until your mortgage loan amount is completed.
The mortgage payoff calculator helps you identify how much more principal amount you have to pay each month so that you’re able to pay off the loan in a specific number of years. Moreover, it also shows the total interest you’ll be saving by paying the mortgage muh earlier as compared to completing the mortgage term.
Moreover, if you’re using this mortgage payoff calculator also allows you to try different scenarios. This will help you understand the different options you have when you’re thinking of paying an extra amount alongside your monthly payment.
We understand that there are various reasons why someone would want to pay off the mortgage earlier, but we feel there are usually two common reasons; you want to be a debt free homeowner, or you want to reduce the interest amount you’ll be paying over the loan’s life span.
In order to pay off the mortgage faster, it’s vital for you to know how much more you have to pay towards your principal balance each month. However, do be mindful that every servicer has their own procedures in ensuring that the extra payments made go towards the principal amount, rather than towards future payments.
What Does Your Mortgage Calculator Tell You?
Basically, the mortgage calculator tells you two main things; how can you reach your goal and give you a loan comparison summary. When you know how much you will have to pay in principal and interest each month, you’ll have a better understanding on how you can reach your goal.
You’ll see the original principal-and-interest payment, and how much more to add to the minimum monthly payment. It will also describe the entire cost of the mortgage in principal and interest payments, original principal-and-interest monthly payment, combined cost in principal and interest if you were to pay it off earlier, and finally, the new principal-and-interest monthly payment.
Other Ways to Payoff Your Mortgage Faster
A mortgage is a vital tool when you’re buying a house, it allows you to become a homeowner without having to make a one shot large down payment. Which is why it’s important to understand the structure of your payments as it’ll show you how long it will take you to pay off your mortgage, and how costly it will be to finance your house purchase.
Here are some ways you accelerate paying off your mortgage faster.
- Pay more than the minimum monthly payment, which we’ve shared extensively in this article.
- There’s a more structured way how this can be done. Basically, what you can do is divide your monthly principal payment by 12, and then add that particular amount to each of your monthly payments. You’ll be making 13 payments as compared to 12 every year.
- Another thing you can do is deposit one-twelfth of your monthly principal payment directly to your savings account every month, and then use that as a means to make the 13th payment.
- Pay the half of your mortgage payment every two weeks; making 26 half-payments is the same as making 13 full payments every year. However, if you opt for this option, make sure that whoever your mortgage servicer is, has the option to receive biweekly payments.
- You can also opt to make a lump-sum payment towards the principal amount. You may be able to do this after receiving a bonus, or even winning a lottery. Basically, any time a large amount of extra cash lands up in your account, you can utilise is pay your mortgage faster.
- You can also refinance to a shorter mortgage payoff term. Moreover, if you can finance it for a lower interest rate on the shorter term, it’s a win-win situation. For example you could try to refinance your 30-year mortgage term for a 15-year term.
There’s no doubt in the fact that your monthly payments will be higher, and you’ll also be paying closing costs, but the overall interest expense will be significantly lower.
Downside of Paying Mortgage Earlier
Now this is one thing many people don’t consider when wanting to pay off their mortgage early. Whereas, a vast majority of financial experts encourage people to put any extra cash flow in their retirement accounts as compared to paying their mortgages off early.
Wondering what the reason is? The stock market has managed to earn an average annual return or 10% for almost 88 years now. As a homeowner, you could warm more by simply investing the extra cash flow in the stock market rather than saving by paying off your mortgage faster.
There’s a high chance whereby you could potentially make more savings this way. Besides, no matter how much you spent on your mortgage interest, you would still receive some amount of that money back at tax time.
Moreover, you could be using up all of your extra funds just to pay down your mortgage, which may have you tie up a wide chunk of the net worth in your home and your liquidity. There’s also a chance that you may lose out on potentially higher returns from other forms of investments.
Furthermore, if there’s a dip in the real estate market right when you’ve decided to sell your property, there’s a good chance that you might not sell your home at a much profitable selling price.
It’s very common for homeowners with a 30-year mortgage to feel like they’re under a never ending debt, not understanding how they’ll continue paying the mortgage off for the next 30 years.
Fortunately, there are a number of ways that they can utilize to overcome this fear of being under a debt their entire lifetime. The mortgage payoff calculator is one thing that is extremely helpful and beneficial.
Ultimately, paying off your mortgage early is a decision that relies on your current financial situation and future goals. If your one and only objective is to be debt-free within the shortest possible time, then refer to the options below see what deems fit for you and your family.
Moreover, this can be extremely appealing to someone who is close to the mortgage finish-line, the mortgage payoff calculator will help you in reaching your goals. We hope this article helped you understand how a mortgage payoff calculator can be utilized.