Your total mortgage loan is made up of two things: the actual dollar amount that was borrowed (the principal) and the amount of interest that you are paying the bank to borrow the money. Each month, you are required to make a payment towards your loan. This is your mortgage payment. At the beginning of your loan, the majority of your monthly mortgage payment goes towards paying off the interest portion of your mortgage. At the end, you begin to pay off the actual principal.
The first part of this calculator computes the following:
- How much your monthly mortgage payment will be based on your mortgage, term and interest
- What amount of this payment goes towards the principal
- What amount of this payment goes towards the interest
- How much is left on your mortgage (the loan balance)
- How much equity you have built. The equity is just the amount of principal you have paid off, or, in simpler terms, how much of your home you have bought back from the bank. Remember that the interest is just what the bank gets for lending you the cash.
The second part of the calculator allows you to look at how things change if you make extra payments, or “prepayments.” Other than paying your mortgage off sooner, the best part of prepayments is that these payments go directly towards the principal, thus lowering the total interest that you pay over time, and increasing the amount of equity that you have built by “buying back” your home. Prepayments can be made in monthly, yearly, or in one-time installments.
One thing to note: some institutions have penalties for making prepayments so be sure to check with your lender before making an actual prepayment!