Aside from owning your home free and clear sooner than the maturity date, paying off your mortgage also helps you save on interest payments. Freeing yourself from a huge financial debt will trigger the start of financial strength in terms of purchasing power and saving for the future. However, you should know first what your mortgage payoff would be before you can be well on your way to financial freedom. Fortunately, you can do this with a bit of preparation and math know-how.
Items you will need
- Mortgage statements
- Mortgage agreement
- Payment stubs
Secure the necessary data pertaining to your home mortgage. Determine how much is your principal loan amount and the applicable interest rate. Take note of how much your monthly mortgage is. If your home mortgage is due for an increase in interest rate, make sure that you are aware of the adjusted monthly repayment amount based on changes in the applicable interest rates. This applies to home mortgage accounts not covered by locked-in interest rates also known as adjustable interest rates.
Determine incidental charges such as taxes and other miscellaneous charges tied to your monthly payments. Knowing these details will help you create a realistic plan on how much you can set aside every month to shorten your amortization repayment.
File and organize payment stubs, receipts and bank transactions or any document with reference to payments you’ve made for your home mortgage. This extra effort on your part will help you monitor accurately the remaining balance on your mortgage account.
Call your lender to reconcile your personal records with what they have on file. Sit down with your account representative. Discuss with your lender your intention of paying off the mortgage before its maturity date. They may be able to give you expert advice and work out a much easier and faster payment plan for you. Clarify and rectify any discrepancy between your personal records and that of your lender.
Start calculating. Using the balance on your last statement, add the per diem (daily interest costs) accrued for all of the days until your lender will receive your payoff payment. For example, if you’re closing on December 15, the balance on that day is $150,000, and your interest rate is 6 percent, multiply the balance amount by 6 percent to give you an annual amount of $9,000. Divide $9,000 by 365, which will give you $24.66 (the amount of interest per day). You pay interest in arrears; therefore, make sure that your lender posts your December's payment. December's payment would cover November's interest due, so you would owe interest days for 15 days in December. Make sure to cover all the days until they receive your payoff. Look at a calendar and count 15 days, and then pad it by adding six more days just to be on the safe side. That adds up to 21 days multiplied by $24.66 per day to give you a total payoff amount of $150,517.86. If your lender posts your payment earlier than 21 days, you will receive the overpayment back.
- Take into account any additional fees your bank may charge you, such as late payment fees, if you were falling behind on your payments and penalty fees for paying off your mortgage early. Check your original loan agreement and double-check with your lender if you need to pay penalty or not. Most banks do not charge penalty fees for early payoffs for mortgages with fixed interest rates, however, others may.
- The Review of Economics and Statistics, Brahima Coulibaly Geng Li, February 2006, Vol. 88, No. 1, Pages 10-19
- University of Georgia, Department of Mathematics: Home Mortgages Formula
- The Mortgage Professor's Website: Mortgage Formulas
- Foner Books: How to Calculate Mortgage Payments
- USA Today: To Pay or Not to Pay Off Your Mortgage
- Mortgage News Daily: Amortization Game - Fun For the Financially Obsessed
- Mortgage Calculator: Free Online Mortgage Calculator
- The New York Times: When to Pay Off Your Mortgage
- Docstoc: Calculate a Mortgage Payment
- USA Today: Should You Payoff Your Mortgage Early?
- AirForceTimes: Paying Off Mortgage Has Long-term Benefits
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