Many borrowers are surprised when they find out how much they’re paying in interest on their mortgage loan. Even having a fixed mortgage with a low rate can result in substantial interest charges, particularly for a term lasting 20 or 30 years. By the time a 30-year fixed mortgage is over, the homeowner has paid a significant amount of money towards interest. [See related article “Understanding Amortization on Fixed Mortgages”]
To reduce the cost of compounding interest, some borrowers choose to prepay their mortgages, shortening the amount of time they have left on their loans. By shaving a few years off the loan term, you can reduce the amount of interest you pay overall. However, you will need to verify whether your lender allows prepayments or charges a prepayment penalty. [See related article “Prepayment for Fixed Mortgages”]
Many homebuyers and homeowners turn to online mortgage calculators to help them better understand their financial situation. The mortgage calculator below will tell you how much interest you can save by providing an additional amount with your mortgage payment. Note, however, that this mortgage calculator does not take certain expenses into consideration (such as mortgage insurance and property taxes) which will increase your monthly housing costs.
MORTGAGE CALCULATOR: How Much Will I Save By Increasing My Mortgage Payment?
This mortgage calculator is for borrowers who want to save on interest and reduce the number of mortgage payments they’ll have to make. There are 6 parts to the mortgage calculator:
1. Original Loan Amount ― The amount of money you borrowed from the lender to buy a house
2. Original Mortgage Length ― The term of your loan (in months or years)
3. Date of Loan ― The month and year your mortgage loan began
4. Interest Rate ― The rate you are charged by the mortgage lender
5. Date of First Extra Payment ― The month and year of your first additional payment
6. Additional Payment Amount ― The extra amount you are adding to your mortgage payment (either monthly, annually, or one-time)
As an additional option, you may check the box next to “Show payment schedule” and the mortgage calculator will generate a chart of every monthly payment amount you will owe throughout the life of your loan.
FOR EXAMPLE: Let’s consider the following assumptions for the prepayment mortgage calculator:
Original Loan Amount ― $300,000.00
Original Mortgage Length ― 30 years (or 360 months)
Date of Loan ― October 2010
Interest Rate ― 5.0%
Date of First Extra Payment ― November 2010
Additional Payment Amount ― $200.00 Monthly
With the assumptions above, the mortgage calculator yields the following results:
“The extra payments will allow you to pay off your remaining loan balance 6 years and 5 months earlier. Because you will pay off your loan sooner, you will save $69,211.27 in interest over the life of the loan.”
If you cannot consistently prepay your mortgage, you may try making additional payments whenever you have the funds. You could consider making a principal reduction payment every so often (e.g., when you get a salary bonus or have extra money in your budget). That way, you can save on interest while working to pay-off your mortgage a little sooner.