Mortgage Tutorial: Should I Prepay My Mortgage?

Mortgage Tutorial: Should I Prepay My Mortgage?

Whenever you make a prepayment on your mortgage, you reduce your loan cost. This case study will show you how to compute the dollar value of savings 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. 
The Mortgage Prepayment 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 the Mortgage Prepayment Calculator. 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. 

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.