Mortgage Prepayment Schedule How to pay off your mortgage early, by making extra payments to the principal during the life of the loan… EXAMPLES: On a 30 Year loan @ 6.0% interest and a $100,000 loan amount (P&I = $599.55) Amount of Extra pmts Time Saved Interest Saved $25 per mo extra pmt $50 per mo extra pmt $75 per mo extra pmt $100 per mo extra pmt $200 per mo extra pmt Save 3 yrs Save 5 yrs & 5 mos Save 7 yrs & 4 mos Save 9 yrs Save 13 yrs & 7 mos Save $13,939.64 in interest Save $24,569.35 in interest Save $33,006.80 in interest Save $39,900.41 in interest Save $58,451.66 in interest
On a 30 Year loan @ 7.0% interest and a $100,000 loan amount (P&I = $665.30) Time Saved Interest Saved Amount of Extra pmts $25 per mo extra pmt $50 per mo extra pmt $75 per mo extra pmt $100 per mo extra pmt $200 per mo extra pmt Save 3 yrs & 3 mos Save 5 yrs & 9 mos Save 7 yrs & 9 mos Save 9 yrs & 5 mos Save 13 yrs & 11 mos Save $18,215.16 in interest Save $31,655.17 in interest Save $42,099.02 in interest Save $50,508.25 in interest Save $72,697.22 in interest
On a 15 Year loan @ 5.5% interest and a $100,000 loan amount (P&I = $817.08) Amount of Extra pmts Time Saved Interest Saved $25 per mo extra pmt $50 per mo extra pmt $75 per mo extra pmt $100 per mo extra pmt $200 per mo extra pmt Save 8 mos Save 1yr & 3 mos Save 1yr & 10 mos Save 2 yrs & 4 mos Save 4 yrs & 1 mo Save $2,355.31 in interest Save $4,478.10 in interest Save $6,402.84 in interest Save $8,155.68 in interest Save $13,849.02 in interest
On a 15 Year loan @ 6.0% interest and a $100,000 loan amount (P&I = $843.86) Amount of Extra pmts Time Saved Interest Saved $25 per mo extra pmt $50 per mo extra pmt $75 per mo extra pmt $100 per mo extra pmt $200 per mo extra pmt Save 8 mos Save 1 yr & 3 mos Save 1 yr & 10 mos Save 2 yrs & 4 mos Save 4 yrs & 1 mo Save $2,639.77 in interest Save $5,013.97 in interest Save $7,161.86 in interest Save $9,115.03 in interest Save $15,436.28 in interest
Mortgage Guidelines to Consider When Planning Your Home Purchase or Refinance… As a general rule when borrowing funds for a home purchase, (depending on the lender’s portfolio of loan products), borrowers have a choice of the type of mortgage program best suited for their needs. Short term mortgage rates are always less than long term mortgage rates. For instance, a 15 year mortgage may be priced at 5.5% while at the same time; a 30 year mortgage will may be priced at 5.75% or 6.0%. Generally speaking, a 10 year mortgage will be the same rate as a 15 year mortgage rate, and a 20 year rate will be the same as a 30 year mortgage rate. Criteria that may lower or raise the rate by a fraction, could be the lock-in period prior to closing, very high or very low FICO scores, and/or the loan amount parameters set by the lender or the loan program. Visit www.MyFico.com . Mortgage money and life insurance are both sold on a cost per basis method. Don’t confuse mortgage rates and modal factors which determine the monthly payment. For example, a 30 year mortgage at 6.0% has a modal factor of 6.00, and a 15 year mortgage at 6.0% has a modal factor of 8.44. Modal factors for various interest rates can be found on amortization charts. (These factors represent the cost in dollars for equal monthly payments to amortize a loan of $1,000.) In other words, if you borrowed $100,000 for 30 years at 6.0%, the monthly principal and interest payment would be $600.00 per month for the life of the loan. This amount represents P&I only, and does not include T&I (taxes and insurances). The total payment, referred to PITI is an acronym for Principal, Interest, Taxes, & Insurance. If you borrowed $100,000 for 15 years at 6.0%, the monthly principal and interest payment would be $844.00 per month for the life of the loan. Again this amount represents P&I only, and does not include T&I (taxes and insurances). The total payment, referred to as PITI includes Principal, Interest, Taxes, & Insurance. It is obvious the 15 year mortgage payment is higher than the 30 year mortgage payment at the same interest rate, but the 15 year mortgage pays off the loan 15 years before the 30 year loan. Sometimes buyers cannot qualify for a 15 year mortgage because the payment is too high for their debt to income ratios. Even so, buyers can have their cake and eat it too, if the buyers will initiate and maintain a mortgage prepayment plan. A 30 year mortgage can be easier on a budget, because the payments are $244 per month or 41% lower than a 15 year mortgage at the same interest rate. (In actuality, the 15 year rate would be lower than the 30 year rate, thus the payment would be less than stated above.) If a buyer cannot afford a 15 year mortgage due to budgetary reasons, a 20 year mortgage could be considered. The option of implementing a prepayment schedule with the 20 year mortgage could result in paying off the loan in a 15 year period or shorter time period.
There are several reasons why a shorter term mortgage (i.e. 15 year) is preferable to a longer term mortgage (i.e. 30 year). First, the principal reduction is greater than with the longer term mortgage. Secondly, the buyer’s equity in the home builds faster than a longer term mortgage. Next, the greater principal reduction allows buyers a competitive advantage in reselling the home against other competing homes for sale. The best reason for a shorter term mortgage is that, it is the best retirement account that a buyer can start, and maintain on his or her own. For illustration purposes, look at a 15 year mortgage amortization as compared to a 30 year mortgage amortization over the same 15 year period. $100,000 loan at 5.75% for 15 years Monthly P&I $830.41 $100,000 loan at 6.00% for 30 years Monthly P&I $599.55
The 15 year mortgage payment is $230.86 more per month or $2,770.32 per year, than the 30 year mortgage payment. Mortgage Balance at the end of years
Year EOY1 EOY2 EOY3 EOY4 EOY 5 EOY10 EOY15 Principal Paid $4,327.80 $4,583.31 $4,853.91 $5,140.48 $5,443.97 $7,252.33 $9,661.37 Balance $95,672.21 $91,088.90 $86,234.99 $81,094.51 $75,650.54 $43,212.78 $00
Mortgage Balance at the end of years
Year EOY1 EOY2 EOY3 EOY4 EOY5 EOY10 EOY15 Principal Paid $1,228.01 $1,303.75 $1,384.17 $1,469.54 $1,560.17 $2,104.44 $2,838.58 Balance $98,771.99 $97,468.24 $96,084.07 $94,614.53 $93,054.36 $83,685.73 $71,048.85
Summary of the 15 year amortization chart: At the end of 1 year or 12 payments, the buyer has accumulated $4,327.80 in principal reduction or equity. At the end of 5 years or 60 payments, the buyer has accumulated $24,249.47 in principal reduction or equity. Assuming no appreciation, if the buyer resold the home after two years and paid a real estate commission of 7%, the buyer could still sell without losing any money. ($100,000 - $7,000 = $93,000. $93,000 $91,088.90 = $1,911.10 balance before any other sales costs.) Assuming no appreciation, if the buyer resold the home after two years and paid a real estate firm 7%, the buyer could still sell without losing any money. ($100,000 - $7,000 = $93,000. $93,000 - $91,088.90 = $1,911.10 balance before any other sales costs.) At the end of 10 years the buyer would have a mortgage balance of $43,212.78. Summary of the 30 year amortization chart: At the end of 1 year or 12 payments, the buyer has accumulated $1,228.01 in principal reduction or equity. At the end of 5 years or 60 payments, the buyer has accumulated $6,945.70 in principal reduction or equity. Assuming no appreciation, if the buyer resold the home after two years and paid a real estate commission of 7%, the buyer would sell with the following losses. ($100,000 - $7,000 = $93,000. $93,000 $97,468.24 = ($4,468.24) negative balance before any other sales costs.) Based on the above chart and previous example, the buyer would have to wait between 5 and 7 years to sell the home and not lose any money. At the end of 10 years the buyer would still have a mortgage balance of $83,685.73. At the end of 15 years, would you rather owe $43,212.78 or $83,685.73? What would you do with an extra $830.41 per month? (Revised: 10/04/06)