Mortgage Calculators and Principal Reduction Strategies

The mortgage principal on a loan is simply the amount borrowed to buy the house excluding interest.  In other words, it’s the price of your new home minus your down payment.  On purchase transactions, unlike a refinance, the closing costs are generally not added to the loan amount.  When a consumers shop for a mortgage, each mortgage company will tell you how much it is prepared to lend you based on your income and your credit score.  Mortgage calculators can help calculate the amount of a loan a borrower may qualify for.  This will help the mortgage borrower determine how much house they can afford.   Once you buy the house and the mortgage is outstanding, monitoring the principal balance and the impact of future regular payments or extra principal reduction can be more difficult.  Again, mortgage calculators can calculate the future principal balance based on additional mortgage payments through the amortization schedule component of the mortgage payment calculator. 

In recent years there has been a plethora of programs offered to borrowers with the attraction of prepaying a mortgage easier, quicker and stress free.  Most of these programs are simply illustrate techniques the borrower can employ to payoff the mortgage early through additional principal payments.  Almost all mortgages have the ability to be repaid without adverse consequences or the need for a costly program.  Loans with prepayment penalties are an exception and can be a barrier to rapid prepayment.  Most of these loans will trigger a prepayment penalty when paid in full within a certain time period, generally three years, but the prepayment penalty may also be activated when a certain percentage of the loan is paid within that time period.  The mortgage calculators will not be able to factor in prepayment penalties and if a borrower has a loan with such an agreement it is strongly advised to read the prepayment penalties before making significant reductions in principal.

Programs to encourage or handle biweekly payments for a mortgage loan are the most widespread programs.  The biweekly payment program is implemented by dividing your monthly mortgage payment in half and paying it every other week, resulting in a net effect of paying an extra payment toward principal each year.  Borrowers don’t need a biweekly program to make extra payments.  The biweekly payment mortgage calculator will calculate the payment and savings without a fee.  With some mortgages you may have to make the extra payments with your normal payment since the mortgage company is not required to accept a partial payment twice a month.  But again, after using the mortgage calculator a borrower can calculate the amount needed to prepay on their own and send the money monthly to the mortgage company.

There are no special programs that reduce a mortgage principal balance without simply adding additional principal to the payment.  The straightforward rules of prepaying a mortgage are the larger the extra principal payment, and the sooner it is made, the faster you pay off the balance.  Extra payments of $100.00 a month will pay off a mortgage faster than a single extra payment at the end of the year of the equivalent amount of $1,200.00.  That same single payment of $1,200.00 at the beginning of the year will pay off the mortgage even faster.  The rule is, the faster the extra payments are received the lower that balance that the interest accumulates on.  Most fee based programs for early mortgage pay offs or principal reduction work on these simple features of paying a greater amount as fast as possible.  The savings can be significant.  A mortgage calculator can run any number of scenarios on increased payment amounts to calculate the reduction in principal on a loan and the subsequent reduction in time and total costs to pay off the loan.

The term of a home loan can be shortened slightly or significantly by contributing more to the mortgage principle each month.  If a borrower is considering early payoff or faster principal reduction the mortgage payment calculator, biweekly mortgage calculator or mortgage amortization calculator will help ascertain the options available that will bring the maximum return.  Some factors such as calculating future interest rates or investment returns and tax benefits are aspects in determining whether paying the balance of your mortgage is better in the long run that may not be readily evaluated by the mortgage calculator.

This entry was posted on Friday, December 12th, 2008 at 1:15 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.