Mortgage Calculator

A software calculator to evaluate and compare various mortgage offers.


Repaying Your Loan Quickly

Paying your mortgage ahead of time is a great way to save a substantial sum, build home equity more quickly and shorten your loan term considerably. The sooner you gain enough equity in your home (usually 20%), the sooner you may ask your lender to remove your private mortgage insurance (PMI) — this will further help you to reduce your total monthly mortgage payment.

There are two most popular ways to sign off the loan sooner than it is due:

  • prepayment;
  • biweekly payment scheme.

Prepayment

Prepayment is full or partial repayment of the principal before the due date. If possible, allocate a few dozen dollars from your family budget to prepay your principal each month. Consult your mortgage lender to find out how to submit the prepayment and avoid possible prepayment penalties. You are free to stop the prepayments any time you wish (for example, to buy a new air conditioner) and then resume them later.

How much can you benefit from prepayment? Suppose you have a 30-year fixed rate mortgage of $150,000 at 7% interest. The required monthly payment would be about $976. Adding $50 a month as prepayment shortens the term by 5 years. For a $100 prepayment per month, you would pay off your mortgage 7 years earlier!

However, you should be aware of certain pitfalls. Your mortgage agreement may contain prepayment penalties, so make sure that you don't incur them. Prepayment also reduces any tax deduction that you are eligible for — you will pay more in taxes.

Biweekly Payment Scheme

Many lenders offer biweekly plans that allow you to split your monthly mortgage payment into two biweekly payments. This results in 13 monthly payments per year rather than 12. In effect, you are making a whole month's prepayment every year, which leads to signing off your mortgage several years sooner.

For example, you take a $100,000 loan at 7.8% for 30 years. Your monthly payment will be $720 ($8640 per year). If you switch to a biweekly payment scheme, you will pay $360 every two weeks ($9360 per year), which will save you 7 years and $43,750 of interest.

Most mortgage contracts allow you to switch to a biweekly payment schedule at the cost of several hundred dollars. In case of a financial crisis, you may switch back to monthly payments. However, should you later wish to return to a biweekly plan, you would have to pay the switching fee again.








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