Prepayment Analysis Calculator
When you're going to buy groceries or a new pair of shoes paying more than necessary is never a good thing. Usually when this happens you end up leaving the store feeling like you've just thrown your money away.
Paying more than necessary doesn't always have to lead to feelings of remorse and guilt; in fact, sometimes paying more than necessary can be a good thing. Mortgage prepayment one example of this theory.
Mortgage prepayment is when an individual pays off their mortgage, or part of it, before the due date. Homeowners usually take advantage of prepayment options when they have a bit of extra cash so that they can cut down the term and interest on their mortgages.
Prepayment allows homeowners to take a considerable chunk out of the amount they owe their lenders and therefore their overall mortgage is reduced. Usually pre-payments can be anywhere from 10%-20% of the total principle owed to the lender. These payments are sometimes made on a monthly basis and other times they are made on the anniversary date of the mortgage.
Before considering prepayment it is important to look into whether or not your mortgage will allow for this, because some don't. Many fixed-rate mortgages forbid prepayment, charge a penalty for it, or restrict the amount that you can prepay over the course of one year. On the other hand, adjustable rate mortgages usually allow prepayment without any fees or penalties so people with this type of plan are most likely to take advantage of the prepayment option.
It is hard to clearly see the benefits of prepayment without having the actual numbers displayed out in front of you and this is where Prepayment Analysis Calculators come in.
What Is A Prepayment Analysis Calculators
Prepayment Analysis Calculators are online instruments that can help homeowners see the true advantages of prepayment.
Advantages of Prepayment:
- Mortgage terms are shortened
- Homeowner pays less in interest
- A great number of mortgage payments are eliminated
Mortgages can be a huge financial burden to carry so it's quite important to get rid of them as soon as possible. Homeowners who pay the necessary amount year after year will no doubt feel chained to their mortgage for life, but this weight can be significantly alleviated with the option of prepayment. With shorter mortgage terms homeowners will gain equity more quickly and become able to separate themselves from their lenders much earlier than would have been possible if they just stuck to a standard payment plan.
Cutting down on interest paid to lenders is the biggest bonus of prepayment. Prepayment will inevitably save homeowners money because with the term of the mortgage shortened significantly the amount of total payments doled out to lenders will also be cut down. In the long run the less payments there are, the less chance there is for interest to build.
Prepayment Analysis Calculators are able to show homeowners these benefits in a concrete way using mathematical equations.
In order to use a Prepayment Analysis Calculator there are a few figures you must have on hand.
Prepayment Analysis Calculators Require:
- The principal amount (or balance) that is remaining on your mortgage in dollars
- The interest rate you are being charged by your lender
- The total length of your mortgage
- The extra amount you are willing to contribute towards monthly payments in dollars
Prepayment Analysis Calculators will differ slightly depending on the website on which they appear but generally after you have entered all of these figures into the appropriate boxes and clicked 'calculate' you will be shocked at the savings that prepayment can provide.
For example: If a person with an outstanding principal of $100,000, on a 30-year mortgage plan, paying 7% in interest were to invest an extra $100 towards paying off their mortgage each month this same person could cut down their term from 30 years to 20 years and 7 months. They could also end up making only 247 total mortgage payments instead of 360, which would mean a savings of $50,508.27. With a savings of over fifty thousand dollars it's amazing that more people don't try to get in on prepayment options.
Obviously the more money you owe to your lender the more prepayment will benefit you. Take for example someone who owes a principal of $200,000 and is on a 30-year mortgage paying 8% in interest. If this person were able to add $200 to each monthly payment they could cut the term of their loan from 30 years to 20 years and 2 months and save $124,920.03 in interest payments. Who knew that paying extra could be so profitable?
Things To Consider
Before purchasing a mortgage it is important to evaluate your finances and try to figure out whether or not prepayment will be a financial possibility in the future. If so it may be worth your while to invest in an adjustable-rate mortgage so that there are no restrictions put on the amount that you are able to prepay and the frequency with which you do so. If you see a raise in the future or know that you will have access to money that is invested in the next few years review prepayment possibilities before you sign anything.
Taking on a mortgage is a huge financial responsibility that you will likely carry for years. If there is a chance to eliminate a decade of payments, and save more than fifty thousand dollars in the process, part of being financially responsible is to figure out how you can take advantage of this savings.
Prepayment Analysis Calculators can help open your eyes to the many benefits of prepayment and when you tally up the results this option may sound hard to resist.
