Should I Make Mortgage Prepayments?

When you make a prepayment 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 - from prepayment.

Prepayment Considerations

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 money.

This site's mortgage calculator makes it easy to compute the savings from prepayment. The following case study illustrates the process.

How to Compute Savings From Mortgage Prepayment

Lara is buying a new home. The details of her mortgage appear below.

Loan Attributes
Mortgage type:	Fixed-rate mortgage
Interest rate:	8.5 percent
Loan amount:	$300,000
Loan term:	30 years

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 mortgage calculator. 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

Main goal:

Options:

Show amortization schedule
Include mortgage insurance
Include hazard insurance

Include property tax
Include prepayments
Include tax deductions

Describe the Loan

Mortgage type:

Loan term (in years):

Loan amount ($):

Interest rate:

Describe the Prepayment Strategy

Number of prepayments per year:

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.

Mortgage attributes	Without prepayment	With prepayment
Number of prepayments per year	0	10
Amount per prepayment	$0	$100
Loan duration	30 years	26 years
Total interest expense	$530,426.89	$443,980.85
Private mortgage insurance (PMI)	$20,100	$15,450
Interest plus PMI	$550,526.89	$459,430.85
Savings	. . .	$91,096.04

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.