Should I Prepay My Mortgage?
Whenever you make a
on your mortgage, you reduce your loan cost. This case study will
show you how to compute the dollar value of savings from prepayment.
Sadly, there is a downside to prepayment. The money that you use for
a mortgage prepayment cannot be used for other purposes - to invest
in the stock market, to take a vacation, to buy a new car, etc.
In order to make the best possible decision about prepayments, you
need to know how much money you can save by making a prepayment.
Then, you can balance prepayment savings against other uses for your
makes it easy to compute the savings
from prepayment. The following case study illustrates
How to Compute Savings From Mortgage Prepayment
Lara is buying a new home. The details of her mortgage appear below.
The lender requires annual private mortgage insurance (PMI) of $1,800
until the principal owed is less than 80 percent of the fair market
value of the home. The fair market value of the home is $325,000.
Lara wants to know how much she could save by making a mortgage prepayment
of $100 ten times per year. To find out, Lara
uses the Mortgage Mavin
Her first step is to describe the analysis she want to conduct. Here's how.
- Choose "Find savings from prepayment" from the Main Goal dropdown box
of the calculator.
- In the "Options" section, check the box for
"Include mortgage insurance".
- Choose "Fixed-Rate Mortgage" as the mortgage type.
The calculator then prompts Lara for the data it needs. She enters
data from the above description into the calculator, and clicks the
Calculate button. The calculator produces a Prepayment Analysis that
shows savings from prepayment. Key results from that analysis are shown below.
|Number of prepayments per year
|Amount per prepayment
|Total interest expense
|Private mortgage insurance (PMI)
|Interest plus PMI
||. . .
The analysis shows that Lara can save about $91,000 over the life of the mortgage, by
making ten $100-prepayments each year. In addition, she will pay the mortgage
off quicker - 26 years with prepayment versus 30 years without prepayment.