The Ratelock loan calculator lets you let you take control of your loan options. Use it to compare rates between different loan offers or properties. It can also be useful for comparing down payments by simply plugging in different loan amounts. You can use the prepayment and refinance scenarios to plan ahead before you lock in a rate with a lender.
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Understanding Prepayments
Prepayments are additional payments made toward your loan principal beyond your regular monthly payment. Unlike your standard monthly payment, which is split between principal and interest, prepayments go 100% toward reducing your remaining loan balance . This direct reduction in principal is what makes prepayments such a powerful tool for saving money over the life of your loan.
Why Timing Matters: The Power of Early Prepayments
The single most important factor in maximizing prepayment savings is timing. Prepayments made early in your loan term have an exponentially greater impact than those made later. Here's why: at the beginning of a mortgage, the majority of your monthly payment goes toward interest rather than principal . In the first year of a 30-year mortgage at 7% interest, over 80% of each payment goes to interest. This means the bank effectively owns most of your property for the first decade, even with a 20% down payment. When you make a prepayment early, you're not just reducing the principal—you're eliminating all the future compound interest that would have accrued on that amount over the remaining loan term. For example, a $5,000 prepayment made in year one of a $500,000 loan at 7% interest can save you over $10,000 in interest and shave an entire year off your loan term. That same $5,000 prepayment made in year 20 might only save you $2,000 in interest and a few months of payments.
The Mathematics of Compound Interest
The reason early prepayments are so effective comes down to compound interest working in reverse . You may have heard financial advisors emphasize saving for retirement early to take advantage of compound growth. With debt, compound interest works against you—each dollar of principal accumulates interest month after month, year after year. When you prepay early, you remove chunks of principal before they have time to compound for decades. A dollar of principal reduction in year one eliminates 29 years of interest charges on that dollar. A dollar of principal reduction in year 25 only eliminates 5 years of interest charges. This is why strategic prepayment in the first 5-10 years of a mortgage can have a dramatic impact on total interest paid . Even modest prepayments of a few hundred dollars per month during this period can result in tens of thousands of dollars in savings and years cut from your loan term. As you move past the midpoint of your loan, the principal-to-interest ratio in your regular payments shifts, and the benefit of prepayments diminishes, though they still provide value.
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