Updated November, 2022
How does the mortgage payment calculator work?
For most people, a house is their largest investment and a mortgage is their largest debt. Ideally, you’d like to get rid of the debt as quickly as possible while building up the amount of money you have invested in the home. The AARP mortgage calculator can help you do just that.
At some point at a mortgage closing, you’ll have to sign a statement saying that you understand the amount of money you’ll be paying to the bank over time. Let’s say you borrow $200,000 for your home at 3.55 percent. (You can get current rates from mortgage giant Freddie Mac.) During that time you’ll pay $200,000 in principal plus another $125,325 in interest, for a total $325,325. That’s a lot of cabbage.
Mortgage interest is amortized so that you pay the bulk of your interest in the first years of your mortgage. If you start paying additional principal, you’ll save a lot of money in interest. Plus, the more additional principal you pay, the less interest you’ll pay over the life of the loan.
If you’re thinking of refinancing your mortgage or considering your options for a new mortgage, the calculator can help you with that, too. For example, the principal and interest for a $200,000 loan at 3.55 percent would be $904. What if you decided on a 15-year mortgage at 2.77 percent? Your monthly payment would rise to $1,356, but you’d pay $44,646.42 in interest over the loan — a savings of $80,679 in interest costs, compared with the 30-year mortgage discussed above. (Interest rates on 15-year mortgages are nearly always lower than those on 30-year mortgages.)
One additional consideration: If your mortgage rate is lower than the inflation rate, you’ll be paying your mortgage back with progressively cheaper dollars. If inflation rises at 4 percent annually and your mortgage stays at 3 percent, you’ve got a pretty good deal.
Why should I pay off my mortgage early?
Let’s take another look at that $200,000 loan. Your principal and interest payment would be $904 a month. If you started paying $100 more a month in the fifth year of that loan, making your payment $1,004 a month, you’d save $15,135 in interest and shorten your loan term by three years and eight months. Start paying $100 more right away and you’ll save $22,800 in interest and pay off your loan four years and 10 months early.
Paying down a mortgage early also accelerates your home equity, which is the value of your home minus the debt you owe. It’s your stake in the property.
Higher home equity has several advantages. For one, most banks require mortgage insurance if you have less than 20 percent equity in the residence. Your premium is part of your loan payment. In general, mortgage insurance is about 0.5 to 1.5 percent of the loan amount per year. So for a $200,000 loan, mortgage insurance would cost around $80 to $250 per month.
Mortgage insurance covers the bank in case you default; it has no payoff value to you. The sooner you get to 20 percent equity, the sooner you can get rid of your mortgage insurance and be free of paying the premium.
Are there any other advantages to making extra mortgage payments?
Another advantage to paying down your mortgage more quickly: As you build up home equity, you get the ability to tap that equity in an emergency or if you need to make an expensive repair or addition. You have to use home equity loans carefully, because if you don’t repay them, you could lose your house. Nevertheless, it’s good to know that the money is available if you need it.
Make sure you get credit for an extra mortgage payment. Most loans allow you to prepay principal. It’s always wise to mark your extra principal when you make your payment and to check that your bank has credited it to your principal, rather than interest. Be sure to ask your lender for instructions on how to make your extra principal payment.
And don’t forget: When you get to 20 percent equity, ask your lender to remove the mortgage insurance payment.