Prepaying a Mortgage: When Does It Maske Sense
Ilyce Glink
So, even though I thought the 15-year mortgage at 4.25 percent we closed on last November was going to be the last home loan for this property, we just refinanced to another 15-year mortgage at 3.75 percent.
We're saving another
Still, it's worth exploring whether prepaying a 15-year mortgage at 3.75 percent makes sense.
It's a question that keeps coming up, as families across the country refinance into extremely low-interest 15-year and 30-year mortgages. Many folks seem to be using the savings not to buy more stuff, but to pay down their debt: credit card, student loan, car loans and, yes, mortgages.
It makes sense to prepay a 30-year mortgage because even making one extra payment a year will shave years off of the loan term and save you thousands of dollars in interest.
To see exactly how much you'll save, you should use one of the many free mortgage calculators available on the Web, like the one I have at my website, ThinkGlink.com. But I also happen to like the amortization calculator at eloan.com. (Please note, I'm not necessarily recommending that you use E-LOAN to get your mortgage, but the calculator is easy to use.)
Let's run the numbers: If you have a 30-year,
If you make one extra payment a year, you'll pay off the loan four years earlier and save
Why don't you get a bigger bang for your buck? Prepaying works better the higher your interest rate. If the same 30-year loan was priced at 7 percent, your monthly payment would be
If you made one extra payment per year, you'd pay off the loan six years earlier and save roughly
When it comes to a 15-year mortgage, prepaying makes less sense. You're already saving 15 years of interest payments, and when the interest rate is so low (again, our new loan is priced at 3.75 percent), it's already virtually free money.
Still, let's take a look at how much we'd save by prepaying: On a
One extra monthly payment per year means we'd pay off the loan in 14 years instead of 15 years and save just
It's not that
Still, there's something to the idea that if we make double payments each year, we'd pay off our entire mortgage in seven years. That's just a hop, skip and a jump from now.
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Real Estate - Prepaying a Mortgage: When Does It Maske Sense
(c) 2010 Ilyce Glink