Real-Life Examples Section
Example scenario:
Loan balance: $250,000
Interest rate: 6.5%
Remaining term: 25 years (300 months)
Standard monthly payment: $1,688
Regular prepayment: $100 monthly
One-time prepayment: $5,000
Scenario 1 – $100 monthly prepayment only:
New monthly payment: $1,788
Total interest (standard): $256,000
Total interest (with prepayment): $218,000
Interest saved: $38,000
Standard payoff: 25 years
New payoff: 21 years 10 months
Time saved: 3 years 2 months
Scenario 2 – $100 monthly + $5,000 one-time prepayment:
Total interest (with prepayment): $210,000
Interest saved: $46,000
New payoff: 20 years 6 months
Time saved: 4 years 6 months
Scenario 3 – $200 monthly prepayment only:
Total interest (with prepayment): $195,000
Interest saved: $61,000
New payoff: 19 years 4 months
Time saved: 5 years 8 months
Clear takeaway: A $100 monthly prepayment saves $38,000 and 3.2 years. Adding a $5,000 lump sum saves an additional $8,000 and 1.3 years. Doubling to $200 monthly saves $61,000 and 5.7 years. Every prepayment dollar saves multiple dollars in future interest.
FAQs
1. What is mortgage prepayment?
Mortgage prepayment is paying more than your required monthly payment. The extra amount goes directly to your principal balance, reducing the total interest you pay and shortening your loan term. Prepayments can be regular (monthly) or one-time (lump sum).
2. Is mortgage prepayment the same as paying extra?
Yes. Prepayment means paying extra toward your mortgage. The terms are often used interchangeably. Both refer to paying more than the scheduled amount to accelerate payoff and save interest.
3. Does prepaying my mortgage save me money?
Yes. Every dollar you prepay reduces your principal balance, which reduces future interest charges. Even small prepayments save thousands over the life of the loan. For example, $100 monthly on a $250,000 loan saves $38,000 in interest.
4. Should I prepay my mortgage or invest?
Compare your mortgage interest rate (guaranteed savings) against expected after-tax investment returns. If your mortgage rate is 6%+, prepayment often wins. If your rate is 3-4%, investing may yield higher returns. This calculator shows your guaranteed savings.
5. What is the best prepayment strategy?
The best strategy depends on your cash flow. If you have steady income, regular monthly prepayments work well. If you receive irregular income (bonuses, tax refunds), one-time prepayments are effective. Many homeowners use both.
6. Can I prepay without a penalty?
Most mortgages allow prepayment without penalty. However, some loans have prepayment penalties, especially if the loan originated recently. Check your loan documents before making large prepayments.
7. How does prepayment affect my monthly payment?
Your required monthly payment does not change when you prepay unless you recast or refinance. Instead, prepayment reduces the remaining balance, which shortens your loan term. You pay the same monthly amount but for fewer months.
8. What is the difference between prepayment and recasting?
Prepayment reduces your principal balance and shortens your loan term. Recasting reduces your monthly payment while keeping the same loan term. This calculator focuses on prepayment (paying extra to shorten term).
