Mortgage Payoff Calculator
This calculator can be used to determine how quickly a mortgage can be paid off by making extra payments each month. The calculator requires several inputs by the user, including:
- The initial mortgage amount, or original size of the loan on the home
- The term of the loan via a drop-down list including 30, 15 and 10 year mortgages
- The annual interest rate charged on the loan
- The remaining principal on the mortgage. This information is provided by lenders each month. If this is a new loan, then the remaining principal would be equal to the original mortgage amount.
- The additional amount to be paid each month to accelerate paying off the loan
The calculator then provides the user with five data points or sets of values:
- The current monthly payment, which is based on the initial mortgage amount, term, and interest rate supplied earlier
- The new payment amount, which is the sum of the current monthly payment plus the additional monthly payment
- The number of months saved by making the additional monthly payment
- The money saved by making the additional payment. Since the loan is paid off early, this savings comes from a reduction in the interest charges on the loan
- Finally, the pie chart shows the user both the number of remaining monthly payments and the number of months saved by making the extra payment each month
Why pay off a mortgage early?
A mortgage payoff calculator is used by homeowners that have discretionary income and would like to shorten the term of their loan without going through the refinancing process. For example, a spouse or partner may have recently returned to work or someone in the household received a significant raise in pay. A portion of this additional income can then be used to help pay down the loan.
Another possible scenario is a home buyer that originally takes out a 30-year mortgage to maximize the total amount borrowed. After several years of increasing household income, it may be possible to make additional payments, thereby turning the 30-year mortgage into a 15 or 20 year loan. Planning for retirement or a child’s college expenses are two more popular reasons someone might want to pay off their mortgage early.
Check with your lender or loan servicer first
Nearly all lenders are required to apply this additional payment to the remaining principal of the loan. In doing so, not only is the principal reduced but the interest charges are lowered as well. Before making extra monthly payments, check with your lender or loan servicer to make sure the money is applied to the principal balance and is not applied to future payments.
Alternative methods to pay off a mortgage
In addition to prepaying a mortgage by making an additional monthly payment, a homeowner can also pay off their mortgage by:
- Making extra payments, for example making one extra mortgage payment each calendar year
- Making a lump sum / one time payment and having it applied to the loan’s principal
- Refinancing the loan to that of a shorter term. For example, converting a 30-year loan into a 15-year loan
- Making bi-weekly payments, which will result in 13 full payments each calendar year
- Recasting your mortgage, which involves making a lump sum payment and working with your lender to adjust your payoff / amortization schedule
Once again, before adopting any of these strategies, it’s important to work with your lender or loan servicer to ensure the extra payments or lump sums are applied to the principal of the loan.
If you want to learn more on this topic, take a look at our blog article Prepaying your Mortgage.