Should I Make Mortgage Prepayments?
When you make a
on your mortgage, you reduce your loan cost and you pay off your loan faster.
This case study shows how to compute the savings - time and dollars -
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 $100 ten times per year. To find out, Lara
uses this site's
Her first step is to describe the analysis. Here's how.
- Choose "Find savings from prepayment" from the Main Goal dropdown box
of the calculator.
- In the "Options" section, check the box for
"Include mortgage insurance".
- Choose "Fixed-Rate Mortgage" as the mortgage type.
The calculator then prompts Lara for the data it needs. She enters
data from the above description into the calculator.
The calculator settings and data entries are shown below.
Describe the Analysis
Describe the Loan
Describe the Prepayment Strategy
Number of prepayments
Amount per prepayment ($):
Enter Insurance Info
Annual mortgage insurance ($):
Appraised value of home ($):
After Lara 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.