How Much Extra Should You Pay To Payoff Your Mortgage Early
You dream of paying off your mortgage early.
You long for the day when you are debt free.
But how do you do it?
How much must you pay each month to be out of debt by a certain date?
What if you wanted to pay off your mortgage in 15 years instead of 30? How much would you save?
The good news is this mortgage payoff calculator makes figuring out your required extra payment easy.
You choose how quickly you’d like to pay off your mortgage, and the calculator will tell you the required extra monthly payment to get it done. It will also tell you how much interest you’ll save!
However, before you start making your extra payments, there are a few factors you’ll want to consider first . . . .
Paying Extra Is The Cheap Easy Way To Pay Off Your Mortgage Early
If you have a mortgage, chances are its a 30year loan. And thats a long time to pay interest.
Many homeowners cant afford refinancing to a shorter, 15year loan term because payments are quite a bit higher.
But theres a way to pay off your mortgage early without any fees or penalties.
Just pay a little extra on your mortgage when youre able.
When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works
You should have a robust household emergency fund before you think about paying extra cash toward your mortgage. An unexpected auto bill, medical expense or other cost can upset your budget if you dont have any liquid cash.
While its possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may also want to put off paying off your mortgage if you have another big expense coming up. Your priority should be putting money into your 401 or IRA. You might also want to consider diverting your extra money into a childs college fund or into savings for an upcoming vacation or wedding.
Theres no point in paying off your mortgage if it means going back into debt in the future.
See how much cash you could get from your home.
Apply online with Rocket Mortgage® to see your options.
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Retiring A Mortgage With Extra Payments
Many homeowners invest in home security systems to protect their property and personal assets. However, a security system will not protect the homeowner against financial disaster or bankruptcy. Making additional mortgage payments will shrink the total amount of interest paid over the life of the loan, and the borrower will pay off the debt more quickly. In addition, the home equity will grow at a faster pace when extra payments are applied to the loan. This provides for a margin of protection by lowering the interest costs. This method gives the property owner a home free and clear of debt. More payments on the principal of the loan equate to assets earning interest at the same rate as the interest rate on the loan.
Make Extra House Payments
Lets say you have a $220,000, 30-year mortgage with a 4% interest rate. Our mortgage payoff calculator can show you how making an extra house payment every quarter will get your mortgage paid off 11 years early, and save you more than $65,000 in interestcha-ching!
But before you start making extra payments, lets go over some ground rules:
- Check with your mortgage company first. Some companies only accept extra payments at specific times or may charge prepayment penalties.
- Include a note on your extra payment that you want it applied to the principal balancenot to the following months payment.
- Dont shell out your hard-earned cash for a fancy-schmancy mortgage accelerator program. You can accomplish the same goal all by yourself.
What Does Paying Your Mortgage Biweekly Do?
Some mortgage lenders allow you to sign up for biweekly mortgage payments. This means you can make half of your mortgage payment every two weeks. That results in 26 half-payments, which equals 13 full monthly payments each year. Based on our example above, that extra payment can knock four years off the 30-year mortgage and save you over $25,000 in interest.
Are Biweekly Mortgage Payments a Good Idea?
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How To Use The Early Mortgage Payoff Calculator
To fill in the calculator’s boxes accurately, consult a recent monthly statement or the first page of the Closing Disclosure that you received when you closed on your mortgage.
Under Loan term , enter the number of years for which your home is financed.
Under What was your mortgage amount?, fill in the loan amount. In the Closing Disclosure, you can find this on the first line of the Loan Terms section.
Under Interest rate, enter the percentage.
Under How many years are left on your mortgage?, you’ll need to enter a whole number, so round up or down.
Likewise, under In how many years do you want to pay off your mortgage?, you’ll have to enter a whole number, rounding up or down.
Under How much do you still owe ?, look for this figure in a recent monthly statement, or contact the mortgage servicer. Or you can use NerdWallet’s mortgage amortization calculator and drag the slider to find out how much you still owe.
Paying Down Your Mortgage Example
So lets assume its still the early days for your mortgagewithin the first decade. Lets say you have a 30-year fixed $200,000 loan at a 4.38% rate that amounts to a lifetime interest charge of $159,485 if you pay the usual 12 times a year. Make that a lucky 13 payments each year, though, and you save $27,216 in interest overall. If you kicked in an extra $200 each month, youd save $6,000 in 10 years, $50,745 in 22½ yearsand youd have the mortgage paid off, too.
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Should I Overpay My Mortgage Or Save Instead
Poor returns on savings are one of the main reasons homeowners consider overpaying their mortgages.
Right now, the best rate you can get on an instant-access savings account is just 0.6%, meaning only slim margins are on offer even for those saving significant sums. To get a rate of more than 1%, youll need to lock up your savings for a year.
These small gains mean that you could be better off in the long run by putting extra money towards your mortgage.
- Find out more: best savings accounts
Exercising Additional Payment Options
When you sign on for a 30-year mortgage, you know you’re in it for the long haul. You might not even think about trying to pay off your mortgage early. After all, what’s the point? Unless you’re doubling up on your payments every month, you aren’t going to make a significant impact on your bottom line right? You’ll still be paying off your loan for decades right?
Not necessarily. Even making small extra payments over time can shave years off your loan and save you thousands of dollars in interest, depending on the terms of your loan.
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How Do I Calculate A Monthly Mortgage Payment
As promised, well now show you how to calculate a monthly mortgage payment manuallyin case you want to know the magic behind our mortgage calculator.
This is useful to know when it comes to amortization since your monthly payment is what actually pays down your mortgage.
To calculate a monthly mortgage payment, heres a scary-looking formula your lender might use:
M = P x ir ^n / ^n – 1
- M = monthly payment
- ir = interest rate per month
- n = number of months
- ^ = This is the exponent symbol. Youll need a special calculator for exponents, which you can find online.
If we use the formula on our example from earlier, your mortgage details would look like this:
- M =
- P = $240,000
- ir = 0.0029167
- n = 180
Lets start with the first part of the formula, P x ir ^n. Heres how that breaks down:
- 240,000 x 0.0029167 ^180
- 700 ^180
Okay, now lets figure out the second part of the formula, ^n-1:
- ^180 – 1
And now lets divide the two parts to get our answer:
- 1,182.42 / 0.6891777009157 = 1,715.70
If we round up, that $1,716 is your fixed monthly mortgage paymentthis is what youll pay every month in order to pay off or amortize your mortgage.
How To Overpay Your Mortgage
We show you how to overpay your mortgage and what the benefits could be. All you need to do is enter:
Your outstanding mortgage balance
How long is left until you have paid off your mortgage
Your mortgage’s interest rate
The extra mortgage payments you would like to make
You can select overpaying your mortgage by the same amount each month, paying off a lump sum now, or doing both.
We’ll then show you:
How much money you could save in interest
How much sooner your mortgage could be paid off
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Funding Your Retirement First
Unfortunately, while its better to pay a mortgage off, or down, earlier, its also better to start saving for retirement earlier. Thanks to the joys of compound interest, a dollar you invest today has more value than a dollar you invest five or 10 years from now. That’s because it will be earning interestand the interest will be earning interestfor a longer period of time. So each year you delay saving for retirement will hurt you a disproportionate amount.
For that reason, it generally makes more sense to save for retirement at a younger age than it does to pay down a mortgage sooner.
Of course, investments dont just rise they fall, too, and their performance can fluctuate wildly with the financial markets. The returns, alas, arent usually as fixed as mortgage payments are. But thats all the more reason to start investing sooner rather than later. Your portfolio has more time to recover from roller-coaster behavior by the market. And the stock market has historically risen over the long term.
Should You Make Extra Mortgage Principal Payments
After settling into a home or finding a little more financial flexibility, many homeowners begin asking, should I make extra mortgage payments? After all, making extra payments can save on interest costs and shorten the length of your mortgage bringing you that much closer to owning your home outright.
Yet, while the thought of paying down your mortgage faster and living in your home without a mortgage sounds great, there can be reasons why making extra payments toward the principal might not make sense.
Sometimes its good to make extra mortgage payments, but not always, says Kristi Sullivan of Sullivan Financial Planning in Denver, Colorado. For example, paying an extra $200/month on your mortgage to knock it down from 30 years to 25 years in a house you only imagine living in for another five years does not help you. You will tie up that extra monthly payment and never realize the benefit of it.”
While many agree the thrill of living without a mortgage is liberating, you can accomplish that in more ways than one. So how do you know if it makes sense for you to begin paying a little extra principal each month on your mortgage? It depends on your financial situation and how you manage your discretionary funds.
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Extra Mortgage Payments Vs Investing
Assume you have a 30-year mortgage of $150,000 with a fixed 4.5% interest rate. You’ll pay $123,609 in interest over the life of the loan, assuming you make only the minimum payment of $760 each month. Pay $948 a month$188 moreand youll pay off the mortgage in 20 years, and youd save $46,000 in interest.
Now, lets say you invested that extra $188 every month instead, and you averaged a 7% annual return. In 20 years, youd have earned $51,000$5,000 ahead of the sum you saved in intereston the funds you contributed. Keep on depositing that monthly $188, though, for 10 more years, and youd end up with $153,420 in earnings.
So while it may not make a huge difference over the short term, over the long term, youll likely come out far ahead by investing in your retirement account.
What To Consider Before Prepaying Your Mortgage
Prepaying your mortgage is a great goal to work toward, but before you do, make sure youve met these financial milestones first:
Once those bases are covered, prepaying a mortgage comes down to discipline and comfort level. Do you want to be completely debt-free, or would you prefer your money working harder for you in other ways? Ideally, you want to pay off your mortgage before retirement so you dont have those monthly payments to worry about if your income becomes more limited.
Making Extra Payments On Mortgage: Is It The Right Move
The short answer is, it depends. Some homeowners will want to explore the possibility of a future lower mortgage payment by paying down principal now. You may feel strongly that shortening the length of your loan is ideal. Or you may want to build wealth separately and save the difference. Essentially it comes down to a few financial and homeownership goals that help you either save time, money, or a little of both.
Not every homeowner will benefit from making an additional mortgage principal payment here and there. Before doing anything else, use the above extra mortgage payment calculator and see how much you may save in the long run.
Check : Are Your Savings Rates As High As Possible
Before you say “my interest rate is crap, so I’ll overpay my mortgage”, you need to check if you can boost the rate you’re getting. I know it’s hard at the moment with savings rates so low, but it’s worth knowing this isn’t a question of whether overpaying your mortgage beats your current savings. Instead, it must be “does repaying my mortgage beat the highest-paying savings available?”
Many people earn pitiful rates, and assume they can’t improve them. Yet better deals are often available. So if you haven’t already, check the Top Savings Accounts and Top Cash ISA guides for all the best rates.
You needn’t switch to them right now, as overpaying your mortgage may win out. But at least know what’s on offer, and compare against that to calculate the right option.
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How The Extra And Lump Sum Calculator Works
Your Mortgages Extra and Lump Sum Calculator will ask you to provide a few important pieces of information for it to perform its number-crunch.
This information will include the principal amount from the home loan, the annual interest rate, additional repayment amount each month when additional repayments will start, and any lump sum payment to be made throughout the life of the loan.
To help you understand how extra and lump sum payments can impact the total amount you will need to repay on your home loan, here is an example provided by the calculator.
Lets say you have an $800,000 home loan with a 4.5% interest rate p.a. over a 30-year loan term.
Additional repayments will be made on top of your standard monthly repayment of $100 each month. An extra $10,000 will be contributed in the sixth month of your loan term.
From this information, the calculator shows that your 30-year loan term will reduce by two years and two months, and youd save a total of $62.438 in interest – a huge amount considering the small outlay.
What The Mortgage Payoff Calculator Tells You
The Summary Results section has two subheadings:
How to reach your goal describes how much you would have to pay in principal and interest every month to meet the payoff goal. It lists the original principal-and-interest payment, and how much you would have to add to the minimum monthly payment to meet your goal.
Loan comparison summary describes the total cost of the mortgage in principal and interest payments, the original monthly principal-and-interest payment, the total cost in principal and interest if you pay it off early, and the new monthly principal-and-interest payment to reach your payoff goal.
“New monthly P& I” and “Original monthly P& I” comprise only the principal and interest portions of your monthly payments. Your full monthly payment will include principal and interest, plus the other monthly costs, such as taxes, homeowners insurance and mortgage insurance .
The early mortgage payoff calculator also lets you enter different numbers into the “In how many years from now do you want to payoff your mortgage?” box to see how those changes affect your total savings.
For more information about how the process of gradually paying off a mortgage works, see this explanation of mortgage amortization.
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Is There A Penalty For Paying Off Your Mortgage Early
Good news: If you want to prepay your mortgage also known as making accelerated payments most lenders allow this without any fees.
In the United States, the vast majority of residential real estate mortgages… do not charge a prepayment penalty, says Bardos.
But be forewarned: Some lenders do charge a prepayment penalty if you pay some or all of your mortgage early.
Per the Consumer Financial Protection Bureau, a prepayment penalty usually only applies if you pay off the entire mortgage balance.
In some cases, prepayment penalties can apply when:
- You refinance your mortgage
- You sell your home within three to five years of purchasing it
- You attempt to pay off a large sum of your mortgage all at once
Fortunately, prepayment penalties do not normally apply if you make accelerated payments in small chunks at a time.
But to be sure, read your loan paperwork carefully. And check with your lender before pursuing any accelerated payment plan.