Personal finance tips: Using a pay ahead mortgage calculator

A pay ahead mortgage calculator, also known as an early mortgage loan payoff calculator, or early payoff calculator, allows homeowners or prospective homebuyers to determine financial benefits of paying loans off early via extra payments.

This type of mortgage calculator is one of many available mortgage calculators, and can be found for free online, in financial software free trials, and if one is willing to pay for financial software, within the purchased financial software. This article will discuss pay ahead mortgage calculators in terms of 1) benefits of the mortgage calculator, 2) important factors to consider, and 3) mortgage calculator input variables.

Benefits of pay ahead mortgage calculators

There are numerous advantages to using a pay ahead mortgage calculator, however, if one has specific mortgage calculations goals, it may be advantageous to cross-reference results with multiple mortgage calculators such as an amortization calculator, 2nd mortgage vs PMI calculator, Home Equity Line of Credit (HELOC) calculator or mortgage refinance calculator. In some cases, a pay ahead mortgage calculator may not be the most beneficial calculator to use in which case one of the above calculators may be more helpful.

Depending on the mortgagee's goals, any one of these calculators may be helpful in determining the best use of payment. For example, paying off a loan early may not have the same financial benefit as refinancing at a lower rate if the lower rate is low enough. In such cases it can be useful to compare the two different scenarios using both types of calculator. A few of the advantages of early mortgage loan payoff calculators are the following:

• Saves time
• Determines savings
• Helps forecast budget expenses
• Recreates loan amortization
• Allows early pay off comparison

Important factors to consider

Pay ahead mortgage calculators may or may not be worthwhile. For example, if the mortgage contract does not allow early payoff, the advantages computed by the early mortgage loan payoff calculator may be inaccurate. Moreover, when an early payoff is allowed by the mortgage contract, it may be disadvantage to utilize the option due to other potential gains with the same money.

For example, if the mortgage amount is $165,000 30 year mortgage at 6% the total payoff with interest will be $356,133.60 according to bankrate.com free mortgage calculator. Moreover, early payoff with $100.00 extra per month using the early pay off calculator computes a total amortized payoff of $309319.59 for a savings of $46,814.01 PLUS 6.33 years of time. That's a 13.15% savings + ROI on $46,814.01 invested for 6.33 years at 5% and compounded monthly = $73,152.48

Alternatively, if the mortgagee had not paid the extra $100.00/month into the early mortgage payoff and instead invested it for 30 years at a rate of 5%, compounded monthly using a compounding calculator, the mortgagee's total end value after 30 years would be $83,572.64. Thus in this case, it would be more advantageous to not pay off the mortgage early. An early mortgage payoff calculator can assist with these types of calculations.

The above and additional considerations one might want to keep in mind when using an early payoff mortgage loan calculator are listed below and include terms of the mortgage contract, conditional use of the calculator and any surcharges associated with extra payment processing by the mortgage financial service provider. Moreover, a mortgage contract should not have an early pay off penalty or disallowance clause in order for the mortgage pay off to be optimally worthwhile and/or possible.

• Mortgage contract
• Periodic percentage of interest paid
• Pre-payment charges or fees
• Opportunity cost
• Free or conditional use calculator

Pay ahead mortgage calculator input variables

When using a pay ahead mortgage calculator certain variables are needed. These variables include the total amount of the mortgage, the time length of the mortgage, the interest rate, type of loan etc. These variables are the base variables with which the extra payments are calculated against. For example, in the above example, the total pay off was $356,133.60 without extra payments, when extra payments of $100.00/month were added, the calculator re-amortized the loan pay off to include the extra payment.

Amortization adjustments can be done by hand by re-computing interest on the remaining balance after the previous month's payment and then reverse annualizing it to be the appropriate monthly amount. However this process is tedious and time consuming making the mortgage calculators quite helpful. Furthermore, by using an early mortgage loan payoff calculator, the mortgagee can compare calculations with bank estimates to ensure the amortization is recalculated correctly.

• Length of mortgage
• Interest rate
• Fixed or variable loan
• Amount of mortgage
• Extra payment amount
• Frequency of extra payment

Summary

Pay ahead mortgage calculators are a constructive financial tool that can benefit mortgagees by helping them determine if early payoff is worthwhile, compare different early payoff results, calculate expenses after the extra payments are incorporated into a budget and 4) provide quantitative results to use when considering investment planning.

These types of calculators are most readily available online at sites such as bankrate.com, however some websites do require an email to receive computed results. Some considerations such as extra fees, and mortgage contract requirements should also ideally be considered when weighing the pros and cons of early mortgage payoff. Using a pay ahead mortgage calculator is relatively easy and only requires the input of a few commonly known variables.

Sources:

1. http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
2. http://www.mortgagecalculator.org/calculators/index.php
3. http://www.mortgageloan.com/calculator/mortgage-payoff-calculator
4. http://www.calculators4mortgages.com/mortgage-calculator/early-payoff-pre-pay

Understanding the loan amortization schedule

A loan amortization schedule is a repayment plan that is calculated before repayment of a loan begins. Typically, amortization schedules are used for fixed interest long-term loans such as mortgages and are recorded on spreadsheet using interest rate calculation software or hand calculation.

The information included on an amortization schedule often consists of columns and rows that include payment dates or periods, declining balance amounts, interest rate and payment amounts. Amortization schedules can either be non-compounded or compounded although the latter is the more likely to be used by various financial institutions.

Non-compounded amortization schedules

A non-compounded amortization schedule is calculated by dividing a total loan amount by a pre-determined repayment plan with or without interest. For example, a no interest loan such as a medical deductible may be broken down into standard fixed payments or perhaps in some cases with graduated i.e. increasing payments.

Standard payments would divide the loan balance equally by the number of payments whereas graduated payments would increase by a fixed amount thereby gradually becoming larger. Those payments are then listed side by side on the amortization schedule with declining balances and payment dates or periods.

A non-compounded amortization schedule with interest is calculated without subtracting periodic interest paid to a loan balance. Rather, the interest on the loan, if any, is calculated one time and then divided among the remaining payments. For example, a loan in the amount of $167,000.52 at an interest rate of 5.75% would have an interest payment of $9602.53.

Since the interest is not being compounded over time, the interest may be divided equally or unequally by the length of the loan depending on the terms of the loan. So if the loan terms are for 15 years, with monthly payments the interest amount will be $53.35 per month. This type of amortization is more cost effective and harder to acquire than a compounded amortization schedule because the total amount of interest is front end rather than continual i.e. the total interest is calculated once rather than 180 times as is the case in compounding.

How reverse compounded amortization schedules are calculated

A more common type of amortization schedule begins with the starting loan balance and an interest rate to determine first payment and then reverse compounds i.e. the subsequent payments will be lower because the principal balance on which interest is calculated is lower.

For example, with a starting balance of $167,000.52 at a fixed interest rate of 5.75% the annualized interest will be $9602.53. If the loan repayment terms are schedule to be annual then $9602.53 will be due in the first year. However, if the payments are monthly, which is more common, the first payment will be determined by dividing $9602.53 by 12 since there are 12 months in a year. So, for a monthly schedule, the first payment due will be $800.21.

Since amortization schedules use reverse compounding, the remainder of the payments will not be $800.21 as would be the case with an amortization schedule that does not compound. In the case of reverse compounding the first payment of $800.21 is deducted from the principal balance of $167,000.52 to make the new balance $166,200,31. Then the second month's interest is calculated on the new balance i.e. 5.75% of $166,200,31 for a second payment of $796.38 or $9556.62/12 using annualized interest. This method of amortization will end up costing more because the interest is calculated for each month of repayment rather than one time only.

Amortization schedules serve multiple purposes. Those purposes include 1) Assist financial institutions and borrowers in negotiating or calculating repayment terms 2) Provide a digital and/or paper record of agreement and 3) Allow financial institutions to generate added revenue using reverse compounding.

Amortization schedules usually have columns in which payment periods or dates are in one column, declining balance is in a second column, interest calculated is in another column and then the new balance is in the last column and carried forward to the next line of the declining balance column.

Amortization is often calculated using reverse compounding which allows a greater amount of interest to be charged to the lenders. When this method of amortization is used it is to the borrowers advantage to pay the loan off in as short a term as possible.