Mortgage Amount: Enter the amount remaining on the mortgage, not the original mortgage amount. The calculator only lets you specify amounts between 14,000 and 500,000.
Term: Enter the current mortgage's term. The term is the amount of time you had to make payments, assuming you haven't already made additional payments to pay down the mortgage earlier. The term is determined at the time you take out the mortgage. The calculator lets you select from 1 to 30 years. (Thirty years is the most common term traditionally.)
Years Remaining: the years remaining on the existing mortgage.
Interest rate: the interest rate you are paying currently.
Additional Monthly Payment: amount you will pay per month over and above what you are paying now. The calculator only allows you to set a single constant amount. With most mortgages, you can also make prepayments.
Mortgage Payoff Explained
The longer you spend paying your mortgage
, the longer interest has to grow. Therefore, the best way to reduce the amount of interest you pay is to pay your mortgage faster. You want to pay down all interest that has accrued each month, and as much as possible of the principal. The principal is the original amount borrowed, usually the purchase price of the home plus any fees or closing costs not paid in advance, minus any prepayments or down payments and any payments you've already made.
Paying Down Mortgage Principal: Interest Savings and the Virtuous Cycle
There is a virtuous cycle (the opposite of a vicious cycle) to paying down your mortgage principal. When you reduce the principal one month, in the next month there is less principal on which the interest will be calculated. That means you will have to pay less interest the next month. Since you have to pay less interest, that means more of your monthly payment goes toward paying down the principal. The following month, you'll have even less principal, even less interest, and even more money to pay toward the principal. It goes on and on each month getting better and better.
Note that in all this your actual payment stays the same. The extra money that goes toward the principal is money you would have paid in interest anyway. Over the course of the mortgage, the savings can easily add up to tens of thousands of dollars. This is money over and above the amount you've paid extra each month--all thanks to paying less in interest.
It can be hard to visualize all this money you're saving, which accelerates with each month you pay down the principal. The calculator visualizes the savings for you. Just click the Summary button of the calculator to see how much total you've saved in interest.
Mortgage Accelerated Payoff Bonus: Investment Value of Savings
Accelerated mortgage payoff potentially has a one-two punch: savings from interest you don't have to pay and investment income from the money you save. Let's say you manage to save $40,000 in interest by paying off your mortgage early. That doesn't have to be the end of the benefit. If you invest that $40,000, or even part of it, you are also up by whatever investment income you get. In as little as ten years, you might be able to double that amount to $80,000. You can use this investment calculator
to compute these returns.
This is precisely how lenders make money from mortgages: they take your interest payments and then invest the money themselves. Only now, you're the one who's making money from your money, not the bank.
This extra money you've saved isn't simply a nice thing. Social Security, pensions
, and even traditional investment
accounts are becoming less secure. Accelerated mortgage payoff is a great way to make sure you can grow old without terrible anxiety about your survival.