How to Calculate an Early Mortgage Pay Off

If you have monthly mortgage amortizations, you'll greatly benefit from paying off your mortgage ahead of time. The escalating costs of living, weakening and slackening state of the economy, and the adverse effect of changing interest rates on home loans are reasons to pay off your mortgage ahead of time. In the long run, you'll substantially save money.

Step 1

Determine all loan application information needed to calculate for an early mortgage payoff. Include the principal loan amount, repayment period, remaining years for repayment and the fixed mortgage interest rate.

Step 2

Identify how much extra money you can set aside to make extra payments per month. This isn't as easy as it seems. It involves genuine commitment and a considerable amount of sacrifice. It means cutting down on your “want” list to attain your “need” list. It means giving up some of the comforts of modern living for the benefit of securing your dreams. Evaluate your financial standing, how much credit you still have and are willing to use to determine the amount of extra payments you can make. Extra payments may pay off in the long run. Nevertheless, aim for an amount that you can realistically sustain.

Step 3

Decide on the length of time you want to pay off your loan and figure out how many monthly payments you'll make. For example, if you want to pay off your mortgage in 20 years instead of 30, you'll have 240 payments.

Step 4

Calculate the new monthly repayment amount by dividing the remaining principal balance by the number of monthly payments for your early payoff. Add the resulting amount to your existing mortgage payment so you can payoff your balance sooner. Bear in mind that during the initial years of the repayment period, you pay mostly the mortgage interest costs. Hence, your payments during the first half of the amortization period pay for the interest of the loan and only partially reduce the principal loan amount. Deduct the extra amounts you can pay every month from the principal loan amount to lower your principal balance.

Step 5

Check your mortgage statement monthly and monitor your payments closely. You will see that the principal balance will be lower each time you make a payment. If you have extra money on hand, such as year-end bonus or a second income, apply it towards your next mortgage payment. Make sure your lender applies the extra money towards paying off your principal balance. Working closely with your lender will ensure the proper crediting of your payments.

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