Prepaid Compare - Version 9/99

A comparison between paying extra payments into you mortgage and investing outside your mortgage, for the purpose of paying loan off early.

Each of us may at some point have money that we want to use to seek early pay-off of our mortgage. The question is what is the best way to accomplish the goal. You can consider paying extra payments into the loan itself or you can consider investing the money for the purpose of accumulating, on the side, the necessary funds to pay the loan off at some point in the future. This calculator compares these two options.

Basic Loan Information

Original Loan Amount: Enter here your original mortgaged amount.

Interest Rate: Enter here the interest rate on your mortgage.

Term (Years): Enter here the term of your current loan.

The next section splits the model into two parts, one examining paying the extra monthly payment into the loan, and the other investing the money into a side account for the purpose of paying the loan off. The side account is assumed to be a growth stock mutual fund. There are four data entry cells in this section.

Extra Monthly Pmt.: Enter here the amount of the extra monthly savings you intend to make. This amount will be automatically entered for you on the investment side of the calculator.

Begin Extra PMT on Pmt #: Enter here the loan payment on which you plan to begin making the extra payments. For Example: a 30-year loan has 360 payments. If you have made 47 payments so far and you plan to begin the extra payment on the next payment, enter 48 as the starting payment. This number is automatically entered for you as the starting point on the investment side of the calculator.

Your Tax Rate: Enter here the tax rate that will likely apply, given the investment you have selected. If you use a growth stock mutual fund, the tax rate you enter here should tend toward your capital gains rate (Either 10% or 20% on the Federal level). If you select an investment that earns interest or dividends primarily, you should enter your ordinary income tax rate.

Gross Investment Return: Enter here the growth rate you want to assume for the investment before any taxes are applied. The calculator will figure the net after tax return for you and it will use the net number in the investment growth calculation.

The calculator then indicates for you the payment number on which the loan will be paid off, and translates that to numbers of years. You can then see which option will pay the loan off sooner. The smaller the numbers are better here.

Additionally, the calculator will indicate the total interest paid over the term of each scenario (payments in the loan & payments in side savings). This indicates the potential tax deductibility of each option. In this case the higher the number the better.