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Understanding the true cost of a home loan is all the more important since most Americans don’t have adequate retirement savings. That’s why paying off your mortgage, an important step, may be more important than you realize in your quest for financial security.
A mortgage payment calculator helps homeowners see how quickly they can pay off their mortgage to help them make the best decisions for their current and future finances.
How to use the mortgage payment calculator
The formula for estimating mortgage repayment is as follows:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] P = principal amount of the loan. i = monthly interest rate. n = number of months required to repay the loan.
But do not worry ; online mortgage calculators do the math for you. You also need to know some basic loan terminology, so that you put the correct numbers into the mortgage payment calculator.
- Remaining years: how many years are left in the term of your mortgage.
- Initial mortgage term: This represents the length of your initial mortgage in years. Usually 15, 20, and 30 are the most common.
- Initial mortgage amount: The amount you financed first. Keep in mind that this includes interest, so don’t confuse it with the remaining principal balance.
- Annual interest rate: The simple interest rate on your loan. It does not include private mortgage insurance, origination fees, or point (s) paid at the start of the mortgage, which is why this rate is lower than your annual percentage rate. (APR). The APR is higher because it includes these costs.
- Mortgage payment in progress: The monthly payment, principal and interest, according to your initial mortgage (amount, interest rate and duration). This does not include current home insurance or tax escrow.
These are your starting point numbers that you will plug into the calculator.
Then you will play with additional principal payments that you can comfortably manage each month.
Keep in mind that your mortgage calculator results will not include insurance or escrow for taxes, so make sure you have these numbers handy to add to your mortgage payment to determine if you can actually afford to expedite payments.
Your result will give you your new monthly “nut” which includes your scheduled payment plus the additional principal payment plus your total savings, or the amount you would save in interest if you switched to accelerated payments.
Frequently asked questions (FAQ) about paying off your mortgage
Should you pay your mortgage in advance?
It depends; and there is no cookie-cutter answer. It’s about whether you prioritize eliminating debt or growing your investment portfolio.
If you get a windfall and are tempted to pay off your mortgage, you might be better off investing the money and sticking to your normal repayment plan.
However, if you prefer the peace of mind of debt elimination, that freedom could outweigh the potential gains from the investments.
Pay off your mortgage or grow your wealth: what is the best solution?
The choice often comes down to whether or not you have retirement savings. The younger you are, the more you should focus on saving for retirement.
Later, when the compound interest has increased your wealth, you can make additional payments on the principal of your mortgage in order to quickly build up equity.
If your retirement portfolio is in good shape, try making additional mortgage payments earlier to reduce the principal you are paying interest on.
What are the disadvantages of paying off your mortgage?
Paying off your mortgage may or may not be a good idea. Here’s why.
- You will not have cash to invest or build up your emergency fund
- If your mortgage rate is low (3% or less), you won’t get a great return on your investment that could earn 10% or more on the stock market.
- You could lose your mortgage interest tax deduction, which means a bigger tax impact
- You’ll save thousands or more on interest payments
- You will have the freedom to be financially free; the money you’ve already spent on your mortgage can be used to pay off other debt until you are completely debt-free
Use a mortgage calculator to decide if the pros outweigh the cons, and be clear about your priorities before you embark on a prepayment.
How can I speed up my mortgage repayment?
Paying off your mortgage faster can be achieved using several strategies:
- Refinance in the shorter term, which means higher payments but less interest over the life of the loan.
- Make additional payments on your capital onlyThese can be regular or sporadic and will reduce the amount of principal you pay interest on, which will also help reduce your monthly payments by eliminating private mortgage insurance (PMI): you can then redirect those funds to payments additional capital.
- Switch to bi-weekly payments, which equates to an additional annual payment: be sure to arrange this with your lender, lest they report you for making a “partial payment”.
- Overhaul your mortgage by applying a lump sum to your capital; the bank will adjust your repayment schedule accordingly at lower fees than refinancing.
- Reduce your balance with a lump sum payment whenever you can though, according to your mortgage calculator, it makes more sense to you than investing in a bargain.
What to do after paying off your mortgage?
Once you’re ready to pay off your mortgage, request a repayment quote from your mortgage agent to make your final mortgage payment.
Other than that, you need to cancel all automatic payments on your mortgage, get a refund on your escrow, let your insurance company and tax collector know that you’ll pay them directly (and make sure you save for those. invoices).
You might see an increase in your credit score if your score was low or poor before you paid off your home (if your credit is good, the boost will be negligible). What to do with the extra money is the big question. You could:
- Treat yourself to a vacation or whatever matters to you
- Add to your retirement fund or university fund for your children or grandchildren
- Make home improvements or repairs
- Pay off your other debts and be financially free
- All the foregoing