# Instead Amortization, refinancing, extra payments, prepay versus invest, rent versus buy. Every decision held against its alternative, computed to the cent, entirely in your browser. URL: https://instead.fyi/ Author: David Estévez (https://destbreso.com) License: the application is free to use. No account, no sign-up, no payment. ------------------------------------------------------------------------ ## What this is Instead is a browser-based simulation lab for mortgage and consumer debt decisions. It is not a calculator in the usual sense: a calculator answers one question and returns one number, and this runs both sides of a decision in full and shows them next to each other. - Every screen holds one decision against its alternative and stops short of naming a winner. The tradeoffs are real and they belong to whoever signs. - Money is integer cents, never floating point. Rate arithmetic runs through decimal.js with half-up rounding, and the final payment absorbs the rounding residue, so a thirty-year monthly schedule closes on payment 360 rather than leaking into a phantom 361st. - Nothing you type leaves your browser. There is no account, no backend and no stored data, and the Content-Security-Policy ships connect-src 'self' so the browser enforces it rather than the claim resting on trust. - Every number printed in the application's own prose is recomputed from the engine by a test, so the words cannot drift from the math. ## How it runs Every calculation happens in the visitor's browser. There is no server-side computation, no API, no database and no telemetry carrying financial input. Analytics are limited to an allowlist of four parameters (type, name, view, count); balances, home prices, rates, scenario names, file names and email addresses are dropped before any event is sent, and a test asserts it. The delivery is a static bundle on Cloudflare Workers. The Content-Security-Policy declares connect-src 'self' alongside the analytics origins and nothing else, which is what makes the privacy claim enforceable by the browser rather than a promise on a page. ------------------------------------------------------------------------ ## Views ### Mortgage explorer URL: https://instead.fyi/#/mortgage Group: explore Amortization, extra payments, milestones and the full table. ### What-if sliders URL: https://instead.fyi/#/what-if Group: explore Move sliders and watch the whole picture move. ### Scenario comparison URL: https://instead.fyi/#/scenarios Group: compare Side-by-side metrics for every saved scenario. ### Refinance URL: https://instead.fyi/#/refinance Group: compare Break-even, naive and complete, and lifetime cost. ### Debt strategies URL: https://instead.fyi/#/debts Group: compare Avalanche, snowball and custom order with a cash-flow waterfall. ### Prepay vs invest URL: https://instead.fyi/#/invest Group: compare Extra cash to the mortgage or to a portfolio. ### Equity & sale URL: https://instead.fyi/#/equity Group: compare Home value, equity, LTV and net proceeds when selling. ### Rent vs buy URL: https://instead.fyi/#/rent-vs-buy Group: compare Unrecoverable costs and net worth, not rent vs payment. ### Return & risk URL: https://instead.fyi/#/returns Group: compare Cash flows, IRR, NPV, leverage and what a falling market would do. ### Velocity banking URL: https://instead.fyi/#/velocity Group: compare The HELOC chunking strategy, measured against the benchmark it is never shown against. ### Strategy Lab URL: https://instead.fyi/#/strategy-lab Group: decide Every allocation of your extra cash on one timeline. ### Optimization explorer URL: https://instead.fyi/#/optimizer Group: decide Thousands of configurations, a Pareto frontier, no single score. ### Sensitivity URL: https://instead.fyi/#/sensitivity Group: decide One variable across a range, everything else fixed. ### Questions & glossary URL: https://instead.fyi/#/learn Group: decide Every term defined and every common question answered. ### Data & settings URL: https://instead.fyi/#/settings Group: decide Import, export, reset, theme and assumptions. ------------------------------------------------------------------------ ## Questions and answers ### Does velocity banking, the HELOC chunking strategy, actually work? Category: Multiple debts Relevant view: https://instead.fyi/#/velocity Partly, and not for the reason it is sold on. Take the two halves separately. The chunking half moves balance from the mortgage to the line, and the interest avoided on one side and charged on the other follow the same amount over the same falling profile. They cancel except for the gap between the rates, so a 9% line against a 6.5% mortgage loses money on every cycle. Set the line to the mortgage rate on the velocity page and that figure goes to zero, to the cent. The half that does work is the float. Income sitting against the line between payday and spending lowers the balance interest is charged on. That is worth your average float times the line rate, it has nothing to do with the lump sums, and you would get it without them. It is the same mechanism as an offset mortgage. On the baseline loan with a 9% line, $9,000 of monthly income and a $10,000 chunk, ten years of it ends about $2,700 ahead of simply paying the same surplus into the mortgage, and about $48,000 ahead of paying only the minimum. The second number is the one you are shown, and roughly 94% of it is just paying extra. ### What is the catch with using a line of credit against my mortgage? Category: Multiple debts Relevant view: https://instead.fyi/#/velocity A fixed-rate mortgage cannot reprice, cannot be called and cannot be frozen. A home equity line can do all three, and it is secured by the same house. Moving balance from the first to the second changes what a bad year does to you, and that change appears in no total on any page here. The costs the model leaves out all point the same way: setup and appraisal fees, annual fees, the draw period ending and becoming a repayment period, and a variable rate that moves in jumps rather than the smooth drift simulated here. Treat the figures as the friendly end of the range. ### Why does a $300,000 loan at 6.5% over 30 years cost about $682,637? Category: The basics Relevant view: https://instead.fyi/#/mortgage Because you make 360 payments of about $1,896.20, and 360 times $1,896.20 is $682,632. The level payment is rounded to the nearest cent, so the schedule underpays by a fraction of a cent each month and the final payment absorbs the residue, coming to $1,900.91 instead. The total is $682,637, of which $300,000 is the money you borrowed and $382,637 is interest. The reason the interest is larger than the loan is that the balance stays large for a long time. Interest is charged every month on what you still owe, and on this loan you still owe about $189,000 after eighteen years. Roughly $1.28 of interest accompanies every dollar borrowed. Nothing unusual is happening at 6.5%. The same loan at 3% costs $455,333 in total, and at 9% it costs $868,990. Time and balance do the work, not an unusual rate. ### Why is my first payment almost entirely interest? Category: The basics Relevant view: https://instead.fyi/#/mortgage Because interest is charged on the balance you currently owe, and at the first payment you owe the entire loan. One month of 6.5% on $300,000 is $1,625.00. Your payment is $1,896.20, so $1,625.00 goes to interest and $271.20 goes to principal, which is 14% of the payment. From there it improves by itself. Each dollar of principal paid lowers the balance, which lowers next month interest charge, which leaves more of the same payment for principal. The split crosses fifty-fifty in month 233 on this loan. This is not a fee structure or a trick in the paperwork. Any loan that charges interest on the outstanding balance and takes a level payment behaves this way. ### Why is an extra payment early worth so much more than the same amount later? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage An extra dollar of principal removes the interest that dollar would have accrued over every month that remains. Early in the loan there are hundreds of months left, so the dollar works for a long time. Late in the loan there are few, so it works briefly. On the baseline loan, $10,000 of extra principal in the first month removes about $53,600 of interest and pulls the payoff forward by 33 payments. The same $10,000 in year 25 removes about $4,400. That is roughly twelve times the effect for the same money, and the only difference is when it arrived. This cuts both ways. It is the strongest argument for prepaying early, and also the reason cash committed early cannot be doing anything else for the same long stretch, which is exactly what the prepay versus invest comparison measures. ### How much does one extra payment a year actually save? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage On the baseline loan, adding one twelfth of the payment to each month, which is $158.02, retires the loan in 290 payments instead of 360. That is about five years and eleven months earlier, and it lowers total interest from $382,637 to about $295,378, a saving of roughly $87,000. Making one full extra payment once a year instead, in the twelfth month, gets you to 292 payments and saves about $84,000. The small difference is timing: the monthly version puts money to work sooner. This is also what an accelerated biweekly plan does. Paying $948.10 every two weeks is 26 half payments, which equals 13 monthly payments a year. If a service charges a setup fee for that, it is charging you for an extra payment you can schedule yourself. ### Should I pay down the mortgage or invest the money? Category: Investing and returns Relevant view: https://instead.fyi/#/invest The tool will not answer that for you, but it will make the tradeoff explicit. Prepaying earns a certain return exactly equal to your loan rate, because every dollar of principal removes interest that would definitely have been charged. Investing earns an uncertain return that you supply as an assumption. The comparison is therefore between a known 6.5% and a number you typed. If the assumed after fee, after tax return is above the loan rate, the invest path ends with more money in the model, and if it is below, the prepay path does. The crossing point is visible on the prepay versus invest page. Two things the arithmetic does not capture. Prepaid principal cannot be withdrawn without a sale or a new loan, so it costs liquidity, and an assumed return is not a realized one: the model has no volatility, so the invest path never has a bad decade. ### What does break-even mean for a refinance, and why does this tool show two of them? Category: Refinancing Relevant view: https://instead.fyi/#/refinance The naive break-even divides the closing costs by the monthly payment saving. Six thousand dollars of costs against a $389 saving breaks even in 15 months. It answers one question: how long until the lower payment has repaid the fees. The complete break-even compares the two whole positions month by month: everything paid so far on each path plus the balance still owed on each path. The first month where the refinanced position is the smaller number is the real break-even. They differ whenever the new loan restarts the term. The naive figure cannot see that a lower payment may be lower because the debt was stretched, not because the rate fell. When the two disagree, the complete one is the one that accounts for what you still owe. ### How can a refinance with a lower monthly payment still cost me more? Category: Refinancing Relevant view: https://instead.fyi/#/refinance Take the baseline loan five years in, with $280,833 left and 25 years to run. Refinancing into a new 30 year loan at 6.0% with $6,000 of costs drops the payment from $1,896.20 to $1,683.74. The naive break-even is 28 months, which sounds comfortable. Over the life of that new loan you would pay about $606,144 plus the $6,000 in costs. Staying on the old loan costs about $568,865 from that same point. The refinance is roughly $43,000 more expensive even though every monthly payment is smaller. The payment fell because 25 years of debt was respread over 30 years, and the half point of rate was not enough to offset the extra five years of interest. A lower payment is a cash flow fact, not a cost fact. ### Avalanche or snowball, and why do they give different answers? Category: Multiple debts Relevant view: https://instead.fyi/#/debts Both pay every minimum and pour the leftover cash into one target debt. They differ only in which debt is the target: avalanche picks the highest rate, snowball picks the smallest balance. When those are the same debt, the two plans are identical. Avalanche pays less total interest, because interest accrues per dollar at each rate and attacking the highest rate removes the most future interest. Snowball closes accounts sooner, which frees minimum payments earlier and shortens the list of bills you are managing. Under a fixed budget the gap in dollars is usually modest, and the tool shows it for your actual debts rather than in the abstract. The comparison is between a measured amount of interest and a benefit you have to price yourself, which is why no ordering is labeled the winner here. ### Is my equity profit? Category: The basics Relevant view: https://instead.fyi/#/equity No. Equity has two sources and only one of them creates wealth. When you pay $500 of principal, your cash falls by $500 and your equity rises by $500. Your net worth at that instant has not moved at all: money changed form, from an account you can spend to an asset you cannot spend a piece of. The other source is appreciation, and that one is new. Nothing left your pocket when the market revalued the house, so a $20,000 rise in value is a $20,000 rise in net worth, on paper. Even the appreciation part is gross rather than net. Turning equity into money means selling, which costs 6% to 10% of the price, or borrowing against it, which creates a new debt. An equity chart that climbs steadily in a flat market is showing you cash conversion, not profit. ### My house doubled in 30 years. Is that a good return? Category: Investing and returns Relevant view: https://instead.fyi/#/equity Doubling over 30 years is growth of 2.34% a year, because 2 raised to the power of one thirtieth is 1.0234. The word doubling sounds impressive because it hides the time it took. If inflation averaged 2.5% over the same period, that doubling lost purchasing power. The nominal number went up and the real one did not, which is the most common way housing returns get overstated in conversation. What the headline also omits is everything spent along the way: interest, taxes, insurance, maintenance and the cost of the sale itself. The equity page reports appreciation as a compound annual rate for exactly this reason. ### What happens to the numbers if my house does not appreciate at all? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/equity Set appreciation to zero and the value line goes flat. Equity still rises, but only from principal paid, so the equity curve becomes a record of cash you moved rather than of wealth created. The sale side changes more sharply. Selling costs are charged on the price regardless of any gain, so a sale in the early years returns less than you put in: the down payment, the closing costs and every dollar of interest and escrow are gone, and the only thing coming back is the principal you paid minus the cost of selling. This is worth running before any decision that assumes appreciation. If a plan only works at 4% a year, the plan is a bet on the housing market, and the zero case tells you how large the bet is. ### What if the house falls 20% in value? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/sensitivity The loan balance does not move with the market, so the entire fall lands on your equity. On a $400,000 home, a 20% fall removes $80,000 of equity whether your equity was $200,000 or $40,000. With 20% down, that fall takes essentially all of your equity: you owe about $320,000 on a home now worth $320,000, and after selling costs a sale would not cover the loan. With 10% down you would be underwater, meaning you would need to bring cash to closing in order to sell. This is the downside face of leverage, and the model shows it exactly: enter a negative appreciation rate, or use the sensitivity page to sweep appreciation across a range and watch where net proceeds cross zero. ### Why does the tool refuse to tell me which option is best? Category: Method and honesty Relevant view: https://instead.fyi/#/optimizer Because best requires weights that only you hold. Paying off a loan faster, keeping cash liquid, lowering the monthly payment and maximizing expected ending wealth are four different objectives, and no arithmetic converts one into another without a preference about your life. What the tool can do without guessing is remove the options that lose on every objective at once. That step needs no weights, and what remains is the Pareto frontier, where each option gives up something to gain something. So the optimizer returns a frontier and a handful of representative configurations rather than a single score. The comparison is honest; the choice is yours. ### How does leverage amplify gains and losses? Category: Investing and returns Relevant view: https://instead.fyi/#/equity With 20% down you control five dollars of house for every dollar of your own money. Because the loan is a fixed claim, every dollar the house gains or loses lands on your equity, so a 5% rise in value is a 25% rise in your stake and a 5% fall is a 25% fall. The amplification is symmetric, but the cost of holding it is not. Interest accrues every month whether the house rose, fell or did nothing, so the break-even move is not zero, it is whatever the carrying cost amounts to. This is why return on the asset and return on your equity are two different numbers, and why the equity page reports both. One describes the property, the other describes your outcome. ### What does IRR mean for a home I live in, and why is it easy to misread? Category: Investing and returns Relevant view: https://instead.fyi/#/equity IRR is the single annual rate that makes the present value of all the cash flows equal to zero. For a home the flows are the down payment and closing costs going out, every housing payment going out, and the net proceeds coming in at the sale. Read literally, that series is all negative until the end, so the rate it produces describes the home as an asset that paid nothing for years. That understates it, because you were housed the whole time, which is why the tool also reports the return with imputed rent counted as a benefit. Three more traps. A series whose signs alternate more than once can have several mathematically valid rates, a series that never turns positive has none, and IRR says nothing about the size of the result: a spectacular rate on a tiny amount of capital is a small amount of money. When the series is ambiguous the tool reports no rate rather than a confident one. ### Why compute a return both with and without imputed rent? Category: Investing and returns Relevant view: https://instead.fyi/#/rent-vs-buy Because a home is two things at once: an asset you own and a service you consume. Counting only the cash flows prices the asset. Counting the rent you did not have to pay prices the whole arrangement, including the living in it. The two numbers usually disagree by a lot. Without imputed rent, a home held for seven years often shows a poor return or a negative one after transaction costs. With it, the same period can look reasonable, because the monthly benefit was real even though no money arrived. Neither figure is the true one. The version without rent is comparable to a stock portfolio, the version with rent is comparable to renting the same house, and knowing which question you are asking is the point of showing both. ### What does this tool deliberately not model? Category: Method and honesty Relevant view: https://instead.fyi/#/settings Volatility above all. Every projection is deterministic, so the invest path never has a bad decade and the house never has a bad year unless you enter one. Returns compound smoothly at whatever rate you typed. Also excluded: taxes beyond a single flat rate applied to investment gains and an optional mortgage interest deduction, inflation unless you switch it on, job loss or any interruption of income, rate resets on adjustable loans, prepayment penalties, loan recasting, private mortgage insurance rules that vary by program, association special assessments, and the state and local variation in nearly every cost line. The reason is not laziness. Each of those needs an assumption that is far less knowable than a rate or a term, and a model that quietly invents one produces confident output from invented inputs. Where a number rests on an assumption, the page showing it says so. ### Why is there no Monte Carlo simulation? Category: Method and honesty Relevant view: https://instead.fyi/#/sensitivity A Monte Carlo run needs a volatility, a distribution shape and correlations between house prices, market returns and interest rates. Those inputs are much harder to know than a rate or a term, and a wrong distribution produces confident percentile bands anyway. There is also a presentation problem. A fan chart reads as a forecast, and people take the median of a simulation as a prediction of their own life. The alternative offered here is deterministic and inspectable: change one input on purpose and see exactly what it does. The sensitivity page sweeps a single variable across a range, and the scenario page holds several complete alternatives side by side. ### Where is my data stored, and does anything leave my browser? Category: Using the tool Relevant view: https://instead.fyi/#/settings None of your numbers leave your browser. There is no backend and no account, and every calculation on every page runs locally in this tab, including the optimizer, which runs in a web worker to keep the interface responsive. The site does count page views so I can see which tools get used, but that report carries the name of the page and nothing else: no cookie, no identifier that follows you between visits, and nothing drawn from a scenario. Your scenarios, debts and preferences are saved in this browser local storage under a single versioned key. That is why they survive a reload and why they do not follow you to another device or another browser. Clearing site data removes them permanently. If the numbers matter to you, export a backup from the settings page. ### How do I export and import my data? Category: Using the tool Relevant view: https://instead.fyi/#/settings The settings page has two export buttons. One writes a full backup as JSON, containing every scenario, your debts and your preferences. The other writes the active scenario alone, which is the file to share when someone wants to reproduce one specific setup. Import accepts either shape. A full backup replaces everything currently in the browser, and a single scenario is added to your list without disturbing what is already there. If the file is valid JSON but not recognizable, nothing is changed and the page says so. The amortization table also exports to CSV, which is the format to use when you want to check the arithmetic in a spreadsheet. ### Why is the last payment different from all the others? Category: Method and honesty Relevant view: https://instead.fyi/#/mortgage The level payment is rounded to whole cents, so it almost never divides the loan perfectly. Over hundreds of months those fractions of a cent accumulate into a small residue, and the final payment is trimmed or extended so the balance lands on exactly zero. On the baseline loan there are 360 payments: 359 of $1,896.20 and a final one of $1,900.91, which carries the accumulated rounding residue. Your lender does the same thing, which is why a real payoff statement rarely matches the regular payment. Any extra principal makes this more visible, since the final scheduled payment is then whatever is left of the balance plus one month of interest on it. ### How does the tool handle rounding? Category: Method and honesty Relevant view: https://instead.fyi/#/settings Every amount is an integer number of cents, so sums, differences and running balances are exact and no fractional dollar is ever stored. That is the only way a schedule of several hundred rows still reconciles with its totals at the end. Whenever a rate multiplies a balance, or a factor is raised to a power, the calculation goes through a decimal library and is rounded once to a whole cent, half up, which is the convention lenders use. Rounding happens at that single point and never again downstream. Display formatting is separate and never feeds back into the engine. A chart axis reading $1.2M is a label; the number behind it is still exact to the cent. ### Is PMI included in the interest figures? Category: Method and honesty Relevant view: https://instead.fyi/#/mortgage No. PMI is insurance that protects the lender against default. It does not accrue on your balance and it stops when the loan to value threshold is reached even though the loan continues, so folding it into interest would misstate both numbers. The tool tracks it inside the monthly housing payment, alongside property tax, insurance and association dues, and reports it as its own line. The same applies to escrow items: they are part of what you pay each month and none of them are part of the cost of borrowing. This also means prepaying does not reduce them. What extra principal can do is reach the cancellation threshold sooner, which ends PMI earlier. ### Does this tool give financial advice? Category: Method and honesty No. It provides mathematical simulations for educational and planning purposes, and it does not provide financial, tax, legal or investment advice. It has no view on what you should do. Every output is arithmetic performed on inputs you supplied. Change an assumption and the conclusion can reverse, which is a feature of the model and a reminder about how much the conclusion depends on the assumption. Actual loan terms, taxes, investment returns, insurance costs and lender calculations may differ from what is shown here. A decision of this size is worth checking against the actual documents and, where the stakes justify it, with a professional who can see your whole situation. ### What does amortization actually mean? Category: The basics Relevant view: https://instead.fyi/#/mortgage It is the process of retiring a loan with a series of payments, where each payment covers the interest accrued since the last one and applies whatever is left to the balance. The payment stays level while its composition shifts. Interest is charged on what is outstanding, so as the balance falls the interest portion falls and the principal portion grows to fill the same payment. The amortization schedule is the row by row record of that process, and it is the ground truth for this app. Totals such as lifetime interest and payoff date are sums over that table rather than separate formulas, which is why they always agree with each other. ### What is the difference between the interest rate and the APR? Category: The basics The interest rate determines your payment. The APR folds certain loan fees into a single annualized number so that two offers with different fee structures can be compared on one figure. The catch is that APR spreads those fees over the full term. If you sell or refinance in year five, fees that the APR amortized over 30 years were actually consumed in five, so the APR understates their cost. Lenders also differ in which fees they include. For a decision about your own holding period, comparing the total cash out of pocket over that period is more informative than comparing two APRs. ### Why does 6.5% not cost exactly 6.5% a year? Category: The basics Because a mortgage quoted at 6.5% charges one twelfth of it each month, and those twelve charges compound. The effective annual rate is 6.697%. The quoted rate is a convention for dividing, not a statement about what a year costs. Products with different compounding conventions can quote the same nominal rate and cost different amounts. The tool follows the US mortgage convention throughout: the periodic rate is the annual rate divided by the number of payments per year, applied to the balance at the start of each period. ### Should I take a 15 year loan instead of a 30 year one? Category: The basics Relevant view: https://instead.fyi/#/scenarios The tool will show you the tradeoff rather than pick. A shorter term raises the payment and cuts lifetime interest sharply, because the balance falls faster and interest is charged on what remains. The mirror image is flexibility. A 30 year loan with voluntary extra principal can reach a similar payoff date while leaving you free to stop paying extra in a bad month. A 15 year loan commits you contractually, which is often priced with a lower rate for exactly that reason. Build both as scenarios and compare them on the metrics you care about: payment, total interest, payoff date and the cash left over each month. The scenario page holds them side by side. ### Do biweekly payments really save money? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage It depends which plan you mean. Splitting your 12 monthly payments into 24 half payments is a cash flow convenience tied to paychecks and saves a negligible amount. Paying every two weeks is different: a year holds 26 two week periods, so 26 half payments add up to 13 monthly payments. That thirteenth payment is the entire source of the savings, and on the baseline loan it retires the loan in about 24 years instead of just over 30. The same result comes from adding one twelfth to each monthly payment yourself. A service charging a setup fee to arrange it is charging for scheduling, not for arithmetic. ### Will extra principal lower my monthly payment? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage No, not by itself. Extra principal shrinks the balance, which means every remaining interest charge is computed on a smaller number and the schedule runs out of months earlier. The payment amount is unchanged. What lowers the payment is recasting, where the servicer recomputes the payment from the reduced balance over the remaining term, usually for a fee and a minimum prepayment. Not every loan offers it and this tool does not model it. This matters for cash flow planning. Prepaying improves your position but does not help the month your income drops, which is the argument for keeping a reserve separate from the loan. ### I have a lump sum. Does it matter which month I apply it? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage Yes, and by more than most people expect. A lump sum removes the interest it would have accrued over the months that remain, so the earlier it lands the longer it works. On the baseline loan, $10,000 applied in month 1 removes about $53,600 of interest. The same amount in month 61 removes about $37,100, and in month 241 about $8,600. Nothing about the loan changed, only the timing. The extra payments editor lets you place a one time amount in any month, and the comparison panel reports the interest and months saved against the same loan without it. ### Could I be penalized for paying early? Category: Payments and prepaying Some loans carry a prepayment penalty, usually a percentage of the amount prepaid or a set number of months of interest, and typically limited to the first few years. Many mortgages have none, and several loan programs are barred from carrying one. This tool does not model penalties. If your note has one, the interest saved shown here is larger than what you would actually keep, and the same applies to any refinance, which triggers the penalty as well. The place to check is the note itself rather than the marketing sheet, since the term appears in the loan documents. ### How do I tell whether a refinance is worth it? Category: Refinancing Relevant view: https://instead.fyi/#/refinance Enter the offer and read the complete break-even, then compare it with how long you expect to hold the loan. A break-even beyond your horizon means the costs are not recovered in the time you own the loan. Watch the term as closely as the rate. Keeping the remaining term captures the rate improvement cleanly; taking a fresh 30 years also stretches the debt, which lowers the payment for a reason that is not a saving. Then read the lifetime cost of both paths, not just the payment. The refinance page shows cumulative cash plus remaining balance on each path, which is the comparison that accounts for a restarted clock. ### Should I roll the closing costs into the new loan? Category: Refinancing Relevant view: https://instead.fyi/#/refinance Rolling them in preserves cash today and converts the fee into a balance that accrues interest for the life of the loan. Paying them in cash spends the cash and leaves the balance clean. Neither is free, and the tool prices both the same way: costs rolled in raise the loan amount, so they show up in the payment and in the lifetime interest. Costs paid in cash show up as cash out at closing and in the break-even. The figure to compare is not the payment but the total of cash paid plus balance owed at your expected horizon, which is exactly what the complete break-even tracks. ### What does a cash-out refinance actually do to my position? Category: Refinancing Relevant view: https://instead.fyi/#/refinance It converts equity into cash and into interest bearing debt in the same move. The new balance is the old balance plus the cash taken plus any financed costs, so both the payment and the lifetime interest rise relative to a plain rate and term refinance. It also raises the loan to value ratio, which can move the loan into a worse pricing tier and can reintroduce mortgage insurance. Lenders generally price cash-out loans above rate and term loans for the same borrower. The cash is a loan against the house, secured by the house. The tool shows it as what it is: a larger balance, a longer or costlier schedule, and more liquidity today. ### Are discount points worth paying? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/scenarios Points are prepaid interest: cash at closing in exchange for a lower rate for as long as you hold the loan. That makes it a break-even question rather than a rate question. Divide the cost of the points by the monthly saving they buy. Holding the loan past that month makes the trade profitable in cash terms; selling or refinancing before it does not. One point on a $300,000 loan is $3,000. Build the two quotes as separate scenarios and compare total cash out at the horizon you actually expect. A quote with points and one without are not comparable until they are on the same footing. ### Do I need 20% down? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/what-if Twenty percent is a threshold, not a rule. Below it, conventional lenders generally require mortgage insurance, which is a monthly cost that protects the lender and buys you nothing except access to the loan. A larger down payment lowers the loan, the payment and the lifetime interest, and it removes that insurance. It also converts liquid cash into an asset you cannot spend a piece of, and it increases the amount exposed to a fall in the value of the home. Both effects are measurable here. Vary the down payment on the what-if page and watch the payment, the insurance, the interest and the liquidity left over move together. ### When does PMI stop? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/mortgage On a conventional loan there are two mechanisms. You may request cancellation once the balance reaches 80% of the original value, and the servicer must terminate automatically at 78% based on the original amortization schedule, provided the payments are current. Extra principal moves the balance down faster and pulls the request date forward. Cancellation based on the home having appreciated, rather than on payments, normally requires a new appraisal that you pay for. Some loan programs carry insurance for the life of the loan and never cancel, in which case the only exits are a refinance or a sale. The tool models the loan to value threshold you enter and stops the charge there. ### What is actually inside closing costs? Category: Buying, selling and renting Lender charges such as origination, underwriting and processing; third party charges such as appraisal, title insurance, survey and recording; any discount points you chose to buy; and prepaid items such as the first year of insurance and the initial escrow deposit. The prepaid items are your own money moving forward in time rather than a fee. The rest is cash that leaves you and does not become equity, which is why a purchase does not break even on day one. The tool treats them as cash at closing and as part of the cost side of every break-even, so they are never quietly ignored in a comparison. ### How much house can I afford? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/mortgage Lenders answer with two ratios. The front end ratio is the full housing payment divided by gross monthly income; the back end ratio adds every other monthly debt payment. Thresholds vary by program and by compensating factors. Both are measured against gross income, before tax, which is why a payment that qualifies can still feel heavy against take home pay. They also count minimum payments rather than balances, so a long term at a small minimum looks lighter than it is. Qualifying is a statement about a lender willingness to lend. Whether the rest of your budget survives the payment is a different question, and it is the one the monthly housing figure here is meant to make concrete. ### Is renting throwing money away? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/rent-vs-buy Rent is entirely unrecoverable, which is true and incomplete. Owning has unrecoverable costs as well: interest, property tax, insurance, association dues, maintenance, and the closing and selling costs paid at each end. Only the principal portion of a payment is recoverable, because it becomes equity. So the honest comparison is unrecoverable cost against unrecoverable cost, not rent against the whole mortgage payment. In the early years of a loan, interest alone can exceed what the rent would have been. The second half is opportunity cost. The renter invests the down payment and closing costs that the buyer spent, and whoever pays less each month invests the difference, so both paths are fully specified and net worth can be compared at any month. ### Why do my net proceeds look so much smaller than my equity? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/equity Equity uses the market value of the home. Net proceeds subtract what the sale itself consumes: agent commission, seller closing costs, repairs and any concessions to the buyer. Together these commonly run 6% to 10% of the price. On a $400,000 sale, that gap is $24,000 to $40,000 that the equity figure showed and the closing statement does not. The costs are charged on the price, so they are owed even when the sale loses money. This is also why short holding periods are expensive: buying and selling within a few years pays both sets of transaction costs out of a small amount of appreciation. ### How much does my house have to appreciate just to break even? Category: Buying, selling and renting Relevant view: https://instead.fyi/#/equity Enough to cover the costs at both ends. Closing costs on the way in and selling costs on the way out mean a sale has to clear several percent of the value before the cash that went in comes back out. The tool solves for that rate directly, so instead of assuming appreciation and reporting a gain, you read the appreciation the deal requires and judge whether it is plausible in your market. The shorter the holding period, the higher the required rate. It is a useful sanity check on any purchase justified by future value, because the required number is often larger than the long run average people have in mind. ### Should the mortgage be part of my debt payoff plan? Category: Multiple debts Relevant view: https://instead.fyi/#/debts It can be, and the tool lets you include it or leave it out. A mortgage is usually the largest balance and the lowest rate, which means an avalanche ordering puts it last and a snowball ordering also puts it last. Including it changes what the debt-free date means. Clearing every consumer debt and clearing the house are different milestones, and the tool reports them separately so a long mortgage does not hide progress on everything else. The mortgage is also secured, which makes missing a payment on it categorically different from missing one on a card. That is a risk consideration the interest arithmetic does not express. ### What is the rollover or snowball effect? Category: Multiple debts Relevant view: https://instead.fyi/#/debts When a debt is paid off, its minimum payment stops being required. If you keep your total budget constant and redirect that freed minimum to the next target, the amount attacking it grows with every account retired. This is what makes any payoff plan accelerate toward the end, and it is independent of the order you chose. The waterfall chart shows it as a flat total height with the bands beneath collapsing into fewer, larger payments. It only works if the freed payment is actually redirected. If it gets absorbed into spending, the projected debt-free date here is optimistic, because holding the budget constant is an assumption about behavior rather than arithmetic. ### What happens if I only pay the minimums? Category: Multiple debts Relevant view: https://instead.fyi/#/debts On an installment loan the minimum is the scheduled payment and the debt retires on time. On revolving credit the minimum is typically a small percentage of the balance plus interest, which stretches repayment over many years and can approach the point where the payment barely exceeds the finance charge. If a payment is ever smaller than the interest accrued, the shortfall is added to the balance and the debt grows on its own. The tool flags that condition rather than simulating an endless loan, because a plan in that state never ends. Entering your real minimums and rates makes the difference concrete: the same debts with and without a modest extra payment usually differ by years, not months. ### Why does the tool report a debt-free date and a mortgage-free date separately? Category: Multiple debts Relevant view: https://instead.fyi/#/strategy-lab Because they answer different questions about your monthly cash. Consumer debts are often cleared years before the house, and the month the last card closes is when a large amount of monthly obligation disappears. Keeping them apart also prevents a 30 year mortgage from swallowing the picture. A plan that clears everything except the house in four years looks very different from one that shows a single date in year 27. The strategy lab reports both on one timeline, along with ending investments and the liquidity left over, so the tradeoffs between the three are visible at once. ### What return should I enter for investments? Category: Investing and returns Relevant view: https://instead.fyi/#/sensitivity There is no right number to hand you, and the tool deliberately does not suggest one. It is an input because it is an assumption, and the whole prepay versus invest comparison pivots on it. What the tool can show is how much the answer depends on it. Sweep the return on the sensitivity page and read where the two paths cross: if the crossing point sits in the middle of the range you consider plausible, the comparison is not telling you much, and if it sits at the edge, the conclusion is robust to your uncertainty. Whatever you enter, it is applied smoothly with no volatility, so the invest path in the model never has a bad decade. That is a real difference from an actual portfolio. ### How does the tool handle taxes on investment gains? Category: Investing and returns Relevant view: https://instead.fyi/#/settings With a single flat rate applied to the gain at the end of the horizon. Real treatment depends on the account, the holding period, your bracket, your state and the year you sell, which is more about your situation than a browser tool should assume. The reason a flat rate exists at all is that ignoring tax entirely would tilt the prepay versus invest comparison, since interest saved by prepaying is not taxed while investment gains generally are. Set the rate to zero to see the pre tax picture. The mortgage interest deduction is handled the same way and is off by default, because it only produces a benefit when itemized deductions exceed the standard deduction. ### Why is the mortgage interest deduction off by default? Category: Using the tool Relevant view: https://instead.fyi/#/settings Because for most households it produces no benefit. The deduction only helps to the extent that itemized deductions exceed the standard deduction, and many people who pay mortgage interest every month still take the standard deduction. Turning it on makes the loan behave as though its rate were lower, which lowers the measured value of prepaying on every page that compares the two. That is a large effect to apply on an assumption. If you have confirmed that you itemize, turn it on and enter your marginal rate. The settings page warns about the consequence rather than hiding it. ### Are the numbers adjusted for inflation? Category: Using the tool Relevant view: https://instead.fyi/#/settings Not unless you switch it on. By default every dollar on every chart is a nominal dollar, so a payoff amount in year 25 is stated in year 25 dollars. That matters most for long horizons. A fixed payment becomes lighter in real terms every year, and a home that grows at the rate of inflation has gained nothing in purchasing power even though the nominal value rose. Turning the adjustment on divides future amounts by compounded inflation so they are expressed in today dollars. Mixing the two conventions in one comparison is the fastest way to reach a confident wrong answer. ### Why does no simulation ever spend my emergency reserve? Category: Using the tool Relevant view: https://instead.fyi/#/settings Because the value of a reserve lies in it remaining available. A model that deploys it to squeeze out extra interest savings would be optimizing by removing the thing that protects the plan. The reserve amount you enter is therefore excluded from every allocation, including the optimizer and the strategy lab. Cash available for strategies is what remains above it. It is also worth noting that prepaid principal is not a reserve. It cannot be withdrawn without a sale or a new loan, which is precisely the situation a reserve exists to avoid. ### What are scenarios for? Category: Using the tool Relevant view: https://instead.fyi/#/scenarios A scenario is a complete, named set of inputs: the loan, the costs, the extra payment rules and the assumptions around them. Saving several lets you compare whole alternatives rather than editing one set of numbers back and forth. The comparison page puts them side by side on the metrics that usually decide things: payment, payoff date, total interest, total cash out and the balance and equity at five, ten and fifteen years. It is the right tool for two quotes from different lenders, a 15 year against a 30 year, or the same house with two different down payments. ### What is the difference between the what-if page and the sensitivity page? Category: Using the tool Relevant view: https://instead.fyi/#/what-if The what-if page moves several sliders at once and shows the whole picture updating live. It is for exploring, and for developing a feel for which inputs matter. The sensitivity page sweeps one variable across a range while everything else stays fixed, and plots the result. It is for answering a specific question: over what range of rates does this conclusion hold. Together they cover both halves of the same job. Explore until something looks decisive, then sweep that one input to see whether it really is. ### What does the Strategy Lab do that the other pages do not? Category: Using the tool Relevant view: https://instead.fyi/#/strategy-lab It puts every allocation of your extra cash on one timeline. Sending it all to the mortgage, all to the highest rate debt, all to investments, splitting it, or running an avalanche and then switching, are all simulated against the same budget and the same horizon. The outputs are deliberately plural: debt-free date, mortgage-free date, total interest, ending investments, net position and liquidity along the way. A plan that wins on one of those often loses on another. Reading it as a ranking would miss the point. It is a map of what your cash can do, and which corner of it you prefer is a judgment about risk and flexibility, not an arithmetic result. ### How does the optimizer search, and what does it return? Category: Using the tool Relevant view: https://instead.fyi/#/optimizer It evaluates thousands of complete configurations across the ranges you allow: term, rate, down payment, extra payment and any refinance offers you defined. Every configuration is run through the same engine as the rest of the app, so nothing is approximated. It then discards every configuration that another one beats on all objectives at once. That step requires no weighting, which is why it is the only filtering the tool does on your behalf. What comes back is the Pareto frontier plus a handful of representative points along it, such as the lowest lifetime cost, the earliest payoff and the lowest monthly payment. The search runs in a web worker, so the interface stays responsive while it works. ### Why do my lender numbers differ slightly from these? Category: Method and honesty Relevant view: https://instead.fyi/#/mortgage Small differences usually come from conventions rather than errors. Servicers vary in day count, in when interest accrues relative to the posting date, in how a partial month at origination is handled, and in how an extra payment is applied if it is not clearly designated as principal. Bigger differences usually come from inputs. Escrow amounts change when a tax bill or a premium changes, mortgage insurance rules vary by program, and a loan that adjusts will diverge from a fixed schedule at its first reset. If a payoff quote and the schedule here disagree by more than a few dollars, the input to check first is the balance and start date, then whether every fee in the quote is present in the scenario. ### Does it matter how I tell the servicer to apply an extra payment? Category: Payments and prepaying Relevant view: https://instead.fyi/#/mortgage It can. An unlabeled extra amount is sometimes applied to the next scheduled payment rather than to principal, which is a very different outcome: it does not reduce the balance and it does not remove future interest. This tool assumes every extra dollar is applied to principal in the month it is made, which is the behavior that produces the savings shown. Designating a payment as additional principal is how that assumption is met in practice. It is worth checking on the statement after the first one, since the difference compounds over the life of the loan. ### My equity chart goes up every month. Am I getting richer every month? Category: The basics Relevant view: https://instead.fyi/#/equity Only partly, and the chart cannot tell you which part on its own. Equity rises from two sources: principal you paid, which moved money from cash into the house without changing your net worth at that instant, and appreciation, which is new. In a flat market the whole rise is conversion. You are more solvent and less liquid than before, and no wealth was created by the act of paying. What does create wealth over time is the interest you no longer pay because the balance is smaller. That shows up as a lower total cost, not as the step in the equity line, which is why the tool separates the two. ### Can I check these numbers myself? Category: Method and honesty Relevant view: https://instead.fyi/#/mortgage Yes, and the app is built so you can. Every headline total is a sum or a lookup over the amortization schedule rather than a separate formula, so the table and the metrics can never drift apart. The amortization table exports to CSV. Open it in a spreadsheet, recompute the interest column as balance times the rate divided by twelve, and the principal column as the payment minus that, and the balance should track to the cent. The financial engine also carries its own test suite, including a regression that pins the baseline loan at a payment of $1,896.20, total payments of $682,637 and total interest of $382,637. ------------------------------------------------------------------------ ## Glossary ### Accelerated biweekly payment (also: accelerated biweekly, biweekly acceleration) Paying half the monthly payment every two weeks, which produces 26 half payments a year and therefore one extra monthly payment a year. A year holds 26 two week periods, so 26 half payments add up to 13 monthly payments instead of 12. The thirteenth payment is pure extra principal, and that is the entire source of the savings. The word accelerated is what distinguishes this from a plan that simply splits the same 12 payments differently. On the $300,000 loan at 6.5% for 30 years, paying $948.10 every two weeks retires the loan in about 24 years instead of just over 30. The same result comes from adding one twelfth of the payment to every monthly payment, which is why the schedule matters less than the extra dollars. Formula: annual paid = (monthly payment / 2) * 26 = monthly payment * 13 Compare with 12 monthly payments on the standard schedule. ### Adjustable rate mortgage (also: ARM, variable rate mortgage) A mortgage whose rate is fixed for an initial period and then resets periodically against an index, changing the payment. An adjustable loan is usually quoted as two numbers, such as 5/1: five years at the initial rate, then a reset every year. Each reset recomputes the payment from the remaining balance, the remaining term and the new rate, subject to caps on how far the rate can move per reset and over the life of the loan. This tool simulates fixed rate loans. An adjustable loan can be approximated here by building one scenario per rate you want to test, but the schedule shown will not reset on its own, so the payoff date and total interest assume the rate you entered holds for the whole term. ### Agent commission (also: realtor commission, broker commission) The percentage of the sale price paid to the real estate agents involved in a sale, charged to the seller at closing. Commission is charged on the sale price, not on the gain, so it is owed even when the sale loses money. It is the largest single line in selling costs in most transactions, and it scales with the value of the home rather than with the work involved. Because it is a percentage of the whole price, commission silently consumes several years of appreciation. On a $400,000 sale, a 5% commission is $20,000, which is roughly the first two years of appreciation at 2.5% a year. Formula: commission = sale price * commission rate ### Amortization The process of retiring a loan with a series of payments, each one covering the interest accrued since the last payment and applying the rest to the balance. In an amortizing loan the payment stays level while its composition changes. Interest is charged on the balance that is actually outstanding, so as the balance falls the interest portion falls with it and the principal portion grows to fill the same payment. This is why the early years feel slow. The balance is at its largest exactly when you have paid the least of it, so the first payments buy very little principal. Nothing unfair is happening: interest is simply being charged on the money you still hold. Formula: interest_t = balance_{t-1} * periodic rate; principal_t = payment - interest_t; balance_t = balance_{t-1} - principal_t One period at a time. The last payment is trimmed so the balance lands on exactly zero. ### Amortization schedule (also: payment schedule, amortization table) The full row by row table of a loan, one line per payment, showing interest, principal, any extra principal and the resulting balance. The schedule is the ground truth of a loan. Totals such as lifetime interest, payoff date and balance after ten years are sums and lookups over this table rather than separate formulas, which is why they always reconcile with each other. Because every row depends on the balance left by the row above it, a change anywhere in the table propagates forward. Adding $100 of extra principal in month 12 changes the interest charged in month 13 and in every month after it. ### APR (also: annual percentage rate) A disclosed annual rate that folds certain loan fees into the interest rate, so two offers with different fees can be compared on one number. APR answers a narrow question: if the fees you paid to get this loan were treated as extra interest, what rate would produce the same payment stream on the money you actually received? It is computed by solving for the rate that makes the present value of the payments equal to the loan amount minus the financed fees. APR assumes you keep the loan for its full term. If you sell or refinance in year five, fees paid at closing were spread over 30 years in the APR but over five years in reality, so the APR understates their true cost. Lenders also differ in which fees they include. Formula: solve for i: amount financed - fees = payment * (1 - (1 + i)^-n) / i, APR = i * periods per year i is the periodic rate. The equation has no closed form solution and is solved numerically. ### Back end ratio (also: total debt ratio, back-end DTI) Total monthly debt payments, housing included, divided by gross monthly income. The back end ratio adds car loans, student loans, credit card minimums and any other recurring debt to the housing payment used in the front end ratio. It is the broader of the two underwriting ratios and usually the binding one for a household carrying other debt. Because it counts minimum payments rather than balances, a large balance on a long term at a small minimum can look lighter than a small balance being retired aggressively. The ratio measures monthly cash commitment, not indebtedness. Formula: back end ratio = (housing payment + all other monthly debt payments) / gross monthly income ### Basis point (also: bps, bp) One hundredth of a percentage point, so 25 basis points is 0.25%. Rates are quoted in basis points to remove the ambiguity of the word percent. A move from 6.50% to 6.25% is a fall of 25 basis points, which is a 0.25 percentage point change and roughly a 3.8% relative change in the rate itself. On a $300,000 loan over 30 years, 25 basis points is worth about $49 a month and roughly $17,700 over the life of the loan, which is why lenders price points in quarters of a point. Formula: 1 basis point = 0.01% = 0.0001 ### Biweekly payment A payment made every two weeks rather than monthly, which by itself changes almost nothing unless it adds up to more money per year. There are two different plans sold under this word. One splits your 12 monthly payments into 24 half payments, tied to two paychecks a month. That is a cash flow convenience and saves a negligible amount of interest. The other charges every two weeks, which is 26 times a year and therefore 13 monthly payments. That plan does save real interest, and the saving comes entirely from the thirteenth payment. A biweekly plan that charges a setup fee is charging you for something you can do by adding one twelfth to each payment yourself. ### Break-even appreciation The annual home appreciation rate at which the net proceeds of a sale exactly equal every dollar you put in. Buying and selling a home costs money at both ends. Closing costs on the way in and selling costs on the way out mean the home has to gain a certain amount before a sale returns your capital, and that amount is larger the sooner you sell. Solving for the rate that makes the sale break even turns the question around. Instead of assuming appreciation and reporting a gain, you read the appreciation the deal requires and decide for yourself whether that number is plausible in your market. Formula: find g such that: price * (1 + g)^years - balance(years) - selling costs = total cash in Solved numerically, since selling costs themselves depend on the sale price. ### Break-even, complete (also: true break-even, complete break-even) The month at which one path becomes cheaper than another once cumulative cash paid and the remaining loan balance are both counted. The complete break-even compares two whole financial positions month by month. For each path it adds up every dollar paid so far, including closing costs, and adds the balance still owed. The first month where the refinanced path shows the smaller total is the honest break-even. It differs from the naive break-even whenever the new loan restarts the clock. A payment that fell because the term stretched is not the same saving as a payment that fell because the rate dropped, and only the complete method can tell them apart. A refinance can have a naive break-even of two years and no complete break-even at all. When that happens the tool says so rather than printing a month. Formula: cost_path(m) = cumulative cash paid through m + balance remaining at m; break-even = first m where cost_new(m) <= cost_old(m) ### Break-even, naive (also: simple break-even, payback period) Closing costs divided by the monthly payment saving, which answers only how long the lower payment takes to repay the fees. This is the number most refinance calculators show, and it is easy to compute: $6,000 of costs against a $200 monthly saving breaks even in 30 months. It is a fair question when the new loan keeps the same remaining term. It becomes misleading when the new loan restarts the term, because part of the payment drop is not a saving at all, it is the same debt spread over more months. The naive figure can report a break-even in two years on a refinance that costs more over its life. Formula: naive break-even months = closing costs / (old payment - new payment) ### CAGR (also: compound annual growth rate) The single constant annual rate that takes a starting value to an ending value over a given number of years. CAGR is a smoothing device. It reports the rate a straight line through the two endpoints would need, and it says nothing about the path taken between them. Two investments with the same CAGR can have completely different year by year experiences. It is the right tool for reading headline claims. A home that doubles in 30 years grew at 2.34% a year, not at 100% divided by 30. Doubling sounds like a large number because the word hides the time. Formula: CAGR = (ending value / beginning value)^(1 / years) - 1 Doubling over 30 years gives 2^(1/30) - 1 = 0.0234, or 2.34% a year. ### Cash on cash return The plain, undiscounted difference between what a sale returns to you and every dollar you put in, ignoring the time value of money. It answers one question only: did the money that went in come back out. Down payment, closing costs and every housing dollar paid up to the sale count as cash in; net proceeds count as cash out. Because it ignores timing, it cannot tell a dollar returned next year from a dollar returned in 20 years, and because it ignores the rent you did not pay, it is usually negative for early sales even in a rising market. It is a starting point, not a rate of return. Formula: cash on cash = net proceeds - total cash in For a rate of return that respects timing, use IRR instead. ### Cash-flow waterfall (also: payment waterfall) A month by month picture of where every dollar of your debt budget goes, minimums first and the remainder to whichever debt the strategy targets. A multi debt plan has one budget and several claims on it. The waterfall pays each contractual minimum, then pours whatever is left into a single target. When that target is retired, its minimum joins the pool rather than leaving your budget. Drawn as a stacked chart over time, the waterfall makes the rollover visible: the total height stays flat while the bands beneath it collapse into fewer and larger payments. ### Cash-out refinance A refinance for more than the current balance, where the difference is paid to you in cash and added to the debt. A cash-out refinance converts equity into cash and interest bearing debt in the same move. The new balance is the old balance plus the cash taken plus any financed costs, so the payment and the lifetime interest both rise relative to a plain rate and term refinance. Lenders usually price cash-out loans above rate and term loans and cap the new loan to value ratio, and a higher ratio can reintroduce mortgage insurance. The cash is not free money: it is a loan against the house secured by the house. Formula: new balance = old balance + cash taken + financed costs ### Closing costs The one-time fees paid to close a loan or a purchase, including lender fees, title, appraisal, recording and prepaid escrow items. Closing costs are cash that leaves you at the start and does not become equity. They are the reason a purchase does not break even on day one and the reason a refinance needs time before its lower payment turns into a saving. They can be paid in cash or rolled into the loan. Rolling them in preserves cash today and converts the fee into a balance that accrues interest for the life of the loan, which the amortization schedule then prices for you. ### CLTV (also: combined loan to value, combined LTV) The sum of every loan secured by the home divided by the value of the home. CLTV counts the first mortgage together with any second mortgage, home equity loan or line of credit. Lenders use it because their risk depends on the total claim against the property, not on their own loan alone. A borrower with a first mortgage at 70% LTV and a home equity line drawn to 15% of value has a CLTV of 85%, which puts them in a different underwriting bucket from an unencumbered 70%. Formula: CLTV = (first mortgage balance + all other liens) / home value ### Compounding Applying a growth or interest rate to a balance that already includes the results of earlier periods. Compounding is the reason small rates matter over long horizons. Each period the rate is applied to a base that the previous period enlarged, so the total grows geometrically rather than linearly. It works the same way on both sides of a balance sheet. On a mortgage it is the reason a 30 year loan at 6.5% repays more than twice the amount borrowed, and on a portfolio it is the reason a contribution made early is worth more than the same contribution made late. Formula: future value = present value * (1 + rate)^periods ### Debt avalanche (also: highest rate first, avalanche method) Paying minimums on every debt and directing all remaining cash to the debt with the highest interest rate. Interest accrues per dollar of balance at each debt rate, so the dollar of extra payment that removes the most future interest is the one applied where the rate is highest. Under a fixed monthly budget this ordering minimizes total interest paid. It can feel slow when the highest rate debt also has the largest balance, because no account closes for a long time. That is a real cost in motivation, not in arithmetic, and it is the tradeoff the snowball method takes the other side of. Formula: target = argmax(rate) among debts with balance > 0 ### Debt service The total amount of cash a set of debts requires each month, regardless of how much of it goes to principal. Debt service measures your obligation, not your progress. Two households with the same debt service can be paying very different amounts of principal depending on the rates and terms involved. It is the numerator of both underwriting ratios and the number that a lender cares about when asking whether a new payment fits. It is also what a rollover redirects rather than removes: paying off one debt frees its service for another. Formula: debt service = sum of required monthly payments across all debts ### Debt snowball (also: smallest balance first, snowball method) Paying minimums on every debt and directing all remaining cash to the debt with the smallest balance. The snowball closes accounts quickly. Each closure frees a minimum payment that joins the pool, so the extra payment grows faster in the early months and the list of open debts shrinks in a way you can see. It pays more interest than the avalanche whenever the smallest balance is not also the highest rate, and the gap is usually modest under a fixed budget. The comparison is between measured dollars and the value you place on early closures, which is a judgment the arithmetic cannot make for you. Formula: target = argmin(balance) among debts with balance > 0 ### Debt-free date The month in which the last balance in the plan reaches zero. The debt-free date is the single output that the different payoff orders compete on alongside total interest. Under a fixed budget the orderings usually finish within a few months of each other, because the same money is retiring the same total debt. It is worth separating from the mortgage-free date. A plan can clear every consumer debt years before the house is paid off, and the two dates answer different questions about your monthly cash. ### Debt-to-income ratio (also: DTI) Monthly debt payments divided by gross monthly income, reported as a front end ratio for housing alone and a back end ratio for all debt. Underwriters use the ratio as a capacity test. It compares committed monthly outflow with gross income before tax, which means the ratio a lender computes is always more generous than the same ratio measured against take home pay. It is a threshold, not a target. Qualifying for a payment says a lender is willing to lend, and nothing about whether the remaining income covers the rest of a household budget. Formula: DTI = total monthly debt payments / gross monthly income ### Depreciation Spreading the cost of a physical asset over its useful life, which is a different accounting idea from amortizing a loan balance. Amortization retires a debt: the balance falls because you paid it. Depreciation allocates the cost of an asset you already own across the years it serves you, and no cash moves when it is recorded. The words are confused because both produce a schedule that declines over time. For an owner occupied home in the United States, depreciation is not deducted at all, so this tool models amortization only. ### Discount points (also: points, mortgage points) A fee paid at closing, each point equal to one percent of the loan amount, in exchange for a lower interest rate. Points are prepaid interest. You hand over cash now in return for a smaller payment every month for as long as you hold the loan, which makes the decision a break-even question rather than a rate question. The break-even is the cost of the points divided by the monthly saving they buy. Holding the loan past that month makes the trade profitable in cash terms, and selling or refinancing before it does not. A rate quote with points is not comparable to one without until both are put on the same footing. Formula: point cost = loan amount * 0.01 * number of points; break-even months = point cost / monthly payment saving ### Discount rate The annual rate used to convert a future amount into what it is worth today. A discount rate encodes what your money could otherwise earn. Discounting at 7% says a dollar received in a year is worth about 93 cents today, because 93 cents invested at 7% would have produced that dollar. It is an assumption, not a fact, and it drives every present value and net present value on the page. Raising it makes distant amounts matter less and makes strategies that pay off far in the future look weaker. Formula: present value = future amount / (1 + rate)^periods ### Dominated option A configuration that another configuration beats on every objective at once, so nothing can be said for it. When options are compared on several objectives, such as total interest, payoff date and monthly cash, an option is dominated if some other option is at least as good on all of them and strictly better on one. Removing the dominated options is a judgment free step: it requires no weighting of the objectives. What survives is the Pareto frontier, where every remaining option gives up something to gain something. Picking among those is a preference, not a calculation. ### Down payment The cash you contribute at purchase, which becomes equity immediately and reduces the amount borrowed. A larger down payment lowers the loan, the payment and the lifetime interest, and it can remove mortgage insurance by putting the loan to value ratio at or below the lender threshold. It also converts liquid cash into an asset you cannot spend a piece of. At the moment of purchase the money changes form rather than disappearing: cash falls, equity rises by the same amount, and net worth is unchanged apart from the closing costs actually consumed. Formula: loan amount = purchase price - down payment; initial LTV = loan amount / purchase price ### Downside scenario A deliberate run of the same simulation with unfavorable assumptions, used to see what the plan looks like when things do not cooperate. Every projection here is deterministic: it does exactly what its inputs say. The way to learn about risk in a deterministic tool is to change the inputs on purpose, setting appreciation to zero or to a negative number, raising the rate, or shortening the horizon. The interesting output is not the number itself but which conclusions survive. A plan that looks similar at 4% appreciation and at 0% is resting on something other than the housing market. ### Effective annual rate (also: EAR, effective rate, APY) The annual rate that accounts for compounding within the year, so it exceeds the nominal rate whenever interest is charged more than once a year. A nominal 6.5% charged monthly means 6.5% divided by 12 each month, and those twelve charges compound. The effective rate is what that actually costs over a year: 6.697%. The distinction matters when comparing quotes with different compounding conventions. Two products quoting the same nominal rate can cost different amounts, and the effective rate is the common footing. Formula: effective rate = (1 + nominal rate / m)^m - 1 m is the number of compounding periods per year. At 6.5% nominal with m = 12 the effective rate is 6.697%. ### Emergency reserve (also: emergency fund) Cash held back for interruptions to income or unplanned expenses, which this tool never spends in any simulation. The reserve exists so that a bad month does not force a sale, a missed payment or high rate borrowing. Its value lies in remaining untouched, which is exactly why no optimizer here is allowed to deploy it. Money put into a mortgage is not part of a reserve. Principal paid ahead of schedule reduces the balance but does not reduce next month payment and cannot be withdrawn without a sale or a new loan. ### Equity The current value of the home minus everything owed against it. Equity moves for two independent reasons: you pay principal, and the market revalues the house. The first is a transfer from your cash into the asset, the second is a change in the asset itself. It is also gross rather than net. Turning equity into money means either selling, which costs several percent of the value, or borrowing against it, which creates a new debt. Equity on a screen is not the same as cash in an account. Formula: equity = home value - mortgage balance - other liens ### Equity accumulation The growth of your stake in the home over time, from principal paid plus any change in the value of the property. Only one of the two sources creates new wealth. Paying principal moves money from one column of your balance sheet to another, so equity rises and cash falls by the same amount and net worth at that instant does not move. Appreciation is different: nothing left your pocket, so the increase is new. Keeping the two apart explains an otherwise confusing chart. An equity curve can climb steadily during a flat market and still represent no wealth created, only cash converted. Formula: equity gained over a period = principal paid + change in home value ### Equity at risk The portion of your equity that a fall in the value of the home would erase, since the loan balance does not move with the market. A mortgage is a fixed claim. When the value of the home falls, the whole decline lands on the equity, which is the residual. A 10% fall on a $400,000 home removes $40,000 of equity whether your equity was $200,000 or $50,000. That is why a small down payment carries more than proportional risk. With 10% down, a 10% fall removes essentially all of the equity, and a further fall puts the balance above the value of the home. Formula: equity after a fall of d = home value * (1 - d) - balance ### Escrow (also: impound account, escrow account) An account the servicer holds to collect property tax and insurance with the monthly payment and pay those bills when they come due. Escrow smooths lumpy annual bills into monthly amounts and gives the lender assurance that taxes and insurance are being paid on the collateral. The escrow portion of a payment is not a loan payment: it is your own money in transit. It is therefore excluded from interest calculations everywhere in this tool. Prepaying the loan does not reduce escrow, and escrow changes when the tax bill or the premium changes rather than when the balance falls. Formula: monthly escrow = (annual property tax + annual insurance) / 12 ### Escrow shortage A deficit found when the servicer reviews the account and the collected amounts did not cover the bills actually paid. The servicer estimates next year bills and divides by 12, plus a cushion. When taxes are reassessed or premiums rise, the estimate falls short and the annual analysis produces a shortage. Recovery usually happens in two ways at once: a lump payment or a spread over the next 12 months, plus a higher ongoing escrow amount. Your housing payment can rise sharply while the loan itself is untouched, which is why the tool keeps escrow separate from principal and interest. ### Extra principal payment (also: extra payment, additional principal) An amount paid above the scheduled payment that is applied entirely to the balance, removing all future interest that balance would have accrued. Extra principal does not prepay next month payment. It shrinks the balance, so every remaining interest charge is computed on a smaller number and the schedule runs out of months earlier. The payment amount itself is unchanged. The value of an extra dollar depends on when it arrives, because it earns the loan rate for however many months remain. On the $300,000 loan at 6.5%, $10,000 applied in the first month removes about $53,600 of interest, while the same $10,000 applied in year 25 removes about $4,400. Formula: balance_t = balance_{t-1} - scheduled principal_t - extra_t Extra is capped at the remaining balance, so the loan never overpays. ### Fixed rate mortgage A mortgage whose interest rate and scheduled payment stay the same for the entire term. A fixed rate loan makes the schedule knowable in advance. Every interest charge, every principal split and the payoff date follow from four numbers: the amount borrowed, the rate, the term and the payment frequency. The fixed part covers principal and interest only. Taxes, insurance, dues and mortgage insurance can all change, so a fixed rate loan does not mean a fixed housing payment. ### Float (also: idle cash, offset balance) The money sitting between the day you are paid and the day it is spent, which earns nothing in a checking account but can offset a debt balance instead. If income lands on the first and bills leave across the month, your average balance is roughly half a month of spending. Parked against a line of credit that float lowers the balance interest is charged on, every day it sits there. What it is worth is simply the average float multiplied by the rate it offsets, less whatever it would have earned elsewhere. It is the entire honest benefit of an offset mortgage, and it arrives whether or not you ever draw a lump sum. Formula: annual benefit = average float * (rate offset - rate otherwise earned) ### Front end ratio (also: housing ratio, housing expense ratio, front-end DTI) The full monthly housing payment divided by gross monthly income. The housing payment in this ratio is the whole thing: principal, interest, property tax, insurance, any association dues and any mortgage insurance. Comparing only principal and interest with income understates the commitment. It sits beside the back end ratio in underwriting. A household with no other debt can pass the back end test on a payment that the front end test would flag, and vice versa. Formula: front end ratio = (principal + interest + taxes + insurance + HOA + PMI) / gross monthly income ### Geometric series A sum in which each term is a constant multiple of the one before it, and the reason the level payment formula has a closed form. Discounting a stream of equal payments produces the terms 1/(1+r), 1/(1+r)^2 and so on, each a fixed multiple of the last. A geometric series of that shape collapses into a single expression instead of a sum of hundreds of terms. Collapsing it gives the present value of an annuity, and inverting that gives the mortgage payment. The compact formula on a lender sheet is a geometric series that has already been summed. Formula: sum of x^k for k = 1..n = x * (1 - x^n) / (1 - x), with x = 1 / (1 + r) ### HOA dues (also: HOA, homeowners association dues, condo fee) Recurring dues paid to a homeowners or condominium association for shared maintenance, amenities and reserves. Dues are part of the cost of owning and not part of the loan. They do not build equity, they are not reduced by prepaying the mortgage, and they typically rise over time along with the costs they cover. Associations can also levy special assessments for large projects. Those are lumpy amounts outside the monthly figure, and this tool does not model them. ### Home appreciation The rate at which the market value of the property changes, which is an assumption in every projection here and never a forecast. Appreciation compounds on the full value of the home, not on your equity, which is what makes it powerful and what makes leverage cut both ways. It also varies enormously by market and period, and it can be negative. Any figure you enter is treated as a constant annual rate. Real markets move in jumps, so the projected value in year seven should be read as the result of an assumption rather than an expectation. Formula: home value at month m = price * (1 + annual rate)^(m / 12) ### Homeowner's insurance (also: hazard insurance, home insurance) Insurance on the property that lenders require and that protects the owner, usually collected monthly through escrow. It covers damage to the structure and liability, and the lender requires it because the house is the collateral. It protects your interest in the property, not the lender loan balance, which is the opposite of mortgage insurance. Premiums are a cost of owning and they change with coverage, claims history and market conditions. They are excluded from interest calculations here and shown as part of the monthly housing payment. ### Horizon (also: time horizon, holding period) The number of months a simulation runs before it reports its result. Almost every comparison here depends on the horizon. Prepaying looks stronger over a long horizon because the interest removed keeps accruing benefits; investing looks stronger over a long horizon when the assumed return is above the loan rate. Costs paid at the start are spread over the horizon, so a short horizon makes closing costs, points and selling costs weigh heavily. Changing the horizon is often more decisive than changing a rate. ### Imputed rent (also: housing consumption, rent not paid) The rent an owner would otherwise have paid to live in an equivalent home, counted as a benefit the home provides. A home is both an asset and a consumption good. Ignoring the living in it part makes ownership look like an investment that paid out nothing for years; counting it at a market rent recognizes a service you received every month. The figure is an estimate, since an equivalent rental is rarely identical. That is why a return computed with imputed rent and the same return computed without it are both worth seeing: the first prices the home as a place to live, the second as a pure asset. Formula: benefit in month m = market rent for an equivalent home in month m ### Inflation The general rise in prices over time, which reduces what a fixed number of dollars buys. A fixed mortgage payment is nominal, so inflation erodes its real weight: the same $1,896 buys less as the years pass, and the household paying it usually has a higher nominal income. That is a genuine advantage of fixed rate debt. It also cuts the other way in reported gains. A home that grows 3% a year in a 3% inflation environment has not gained purchasing power at all. Inflation is off unless you switch it on, and while it is off every dollar on every chart is a nominal dollar. Formula: real value = nominal value / (1 + inflation rate)^years ### Interest The charge for borrowing, computed each period on the balance still outstanding. Interest is a rent on money. Because it is charged on what you still owe, it falls as the balance falls, and it is the only part of a mortgage payment that prepaying can remove. The first payment on the $300,000 loan at 6.5% is $1,896.20, of which $1,625.00 is interest and $271.20 is principal. Nothing unusual is happening: one month of 6.5% on $300,000 is $1,625. Formula: interest for a period = balance at the start of the period * periodic rate ### IRR (also: internal rate of return) The constant annual rate that makes the net present value of a series of cash flows equal to zero. IRR turns a messy stream of payments and receipts into one annualized rate, which is why it is the usual way to compare a property with a portfolio. It respects timing, so a dollar returned early counts for more than a dollar returned late. It is also easy to misread. A series whose signs change more than once can have several valid roots, a series that never turns positive has none, and the number says nothing about how large the flows were. Reinvestment at the same rate is implied and rarely available. For a home you live in, the answer also depends entirely on whether you count the rent you did not pay. Without it the flows are all outgoing until the sale, and the reported rate is about an asset, not about housing. Formula: find r such that: sum over t of CF_t / (1 + r)^t = 0 Solved numerically. This tool reports no rate rather than a confident one when the series admits several roots or none. ### Lender fees (also: junk fees, processing fees) Charges a lender adds for making the loan, such as underwriting, processing and document preparation. These sit alongside the origination fee within closing costs. They vary between lenders for the same loan, and some appear in the APR while others do not, which is why comparing quotes means comparing the itemized totals rather than one headline number. In this tool they are part of the cash needed at closing and part of the cost side of every refinance break-even. ### Level payment (also: annuity payment, monthly payment, P&I) The constant periodic payment that retires a loan exactly over its term at a given rate. The payment is derived by requiring that the present value of all the payments, discounted at the periodic rate, equals the amount borrowed. Everything else about the loan follows from it. On $300,000 at 6.5% for 30 years the payment is $1,896.20. A zero rate loan is the degenerate case and simply divides the principal by the number of periods. Formula: payment = P * r * (1+r)^n / ((1+r)^n - 1) P is the amount borrowed, r the periodic rate, n the number of periods. When r is zero, payment = P / n. ### Leverage Controlling an asset larger than your own capital by borrowing the difference, which multiplies both gains and losses on that capital. Put 20% down and you control five dollars of house per dollar of your own money. Because the loan balance does not move with the market, every dollar the house gains or loses accrues to your equity, so a 5% rise in value is a 25% rise in your stake and a 5% fall is a 25% fall. Leverage also has a running cost, the interest, which accrues whether the asset rises or not. The amplification is symmetric, and the cost of holding it is not. Formula: leverage ratio = home value / equity; return on equity is approximately return on asset * leverage ratio ### Line of credit (also: HELOC, home equity line of credit, revolving credit) A revolving loan you can draw on and repay repeatedly up to a limit, charging interest only on the balance outstanding. Unlike a mortgage, which hands you a fixed sum and a fixed schedule, a line lets you borrow and repay as often as you like. Interest is charged on what is drawn, usually on the average balance across the period, so repaying early in the month costs less than repaying late. Home equity lines are secured by the house and almost always carry a variable rate tied to an index. The rate can rise, the draw period ends and turns into a repayment period, and the lender can reduce or freeze the line. None of those things can happen to a fixed-rate mortgage. ### Liquidity How quickly and cheaply an asset can be turned into spendable cash without a loss of value. Cash and most brokerage holdings are liquid. Home equity is not: reaching it requires a sale that costs several percent of the value and takes months, or a new loan that must be underwritten and repaid. This is the dimension that prepaying trades away. A dollar of extra principal is a certain reduction of future interest and an irreversible one, since it cannot be recalled when income stops. ### LTV (also: loan to value, loan-to-value ratio) The loan balance divided by the value of the home, expressed as a percentage. LTV is the lender measure of cushion. It falls as you pay principal and as the home appreciates, and it rises if the home loses value. Thresholds at 80% and 78% commonly govern mortgage insurance, and pricing tiers usually step at 80%, 90% and 95%. Which value goes in the denominator matters and varies by rule. Automatic mortgage insurance termination is based on the original price or appraised value, while a request based on a rise in market value normally requires a new appraisal. Formula: LTV = loan balance / home value ### Lump sum payment A single large extra payment applied to principal in one month rather than spread across many. A lump sum behaves like any other extra principal: it removes the interest that the amount would have accrued over every month that remains. Its effect therefore depends heavily on when it lands. Unless the loan is recast, the payment does not change afterward. The balance and the payoff date change, and the same payment then retires the smaller balance faster. ### Minimum payment The smallest amount a lender requires this month to keep an account current. On an installment loan the minimum is the scheduled payment and it retires the debt on time. On revolving credit it is typically a small percentage of the balance plus interest, and it can stretch repayment over decades. In a multi debt plan the minimums are paid on every account first, and only the remainder is directed at a single target. Missing a minimum to fund the target trades a small interest saving for a fee and a credit event. ### Monte Carlo simulation A technique that runs a model thousands of times with randomly drawn inputs to produce a distribution of outcomes, which this tool deliberately does not use. A Monte Carlo run would require you to supply a volatility, a distribution shape and a correlation between house prices, market returns and rates. Those inputs are far less knowable than a rate or a term, and a wrong distribution produces confident output anyway. The second reason is presentational. A percentile band looks like a forecast, and people read the median of a simulation as a prediction. This tool stays deterministic: change an input on purpose, see exactly what it does, and use the sensitivity and scenario pages to map the range you care about. ### Mortgage interest deduction A tax deduction for mortgage interest that only produces a benefit when itemized deductions exceed the standard deduction. The benefit is not the interest times your rate. It is your marginal rate applied to the amount by which your itemized total exceeds the standard deduction, which for many households is zero even though they pay mortgage interest every month. The setting is off by default here. Turning it on makes the loan behave as though its rate were lower, which lowers the measured value of prepaying, so it should only be on if you have confirmed that you itemize. Formula: benefit = marginal tax rate * max(0, itemized deductions - standard deduction) ### Negative amortization (also: neg am, deferred interest) What happens when a payment is smaller than the interest accrued, so the unpaid interest is added to the balance and the debt grows. If the payment does not cover the interest charge, the shortfall capitalizes. Next period interest is then charged on a larger balance, so the gap widens on its own unless the payment rises or the rate falls. It appears in payment option loans, some student loan plans, and any revolving account whose minimum is smaller than the finance charge. This tool flags it rather than simulating a growing balance, because a payment below the interest charge means the loan as entered never ends. Formula: if payment < interest: balance_t = balance_{t-1} + (interest - payment) ### Net present value (also: NPV) The sum of a series of cash flows after each one is discounted back to today at a chosen rate. NPV puts amounts arriving at different times on a common footing. A positive NPV means the flows are worth more than the alternative represented by the discount rate; a negative one means they are worth less. The whole answer hinges on the discount rate you choose, so an NPV without its rate is meaningless. Changing the rate can reverse the sign, which is why it belongs in a sensitivity sweep rather than in a single headline number. Formula: NPV = sum over t of CF_t / (1 + r)^t Money leaving you is negative, money reaching you is positive, and t counts periods from today. ### Net proceeds What a seller actually receives: the sale price minus everything owed against the property and minus the costs of selling. Net proceeds is the number that turns equity into cash. Equity uses the market value; proceeds subtract the commission, seller closing costs, repairs and concessions that the sale consumes. The gap is usually large enough to change a conclusion. On a $400,000 sale, 6% of total selling costs is $24,000 that the equity figure showed and the closing statement does not. Formula: net proceeds = sale price - loan balance - selling costs ### Net worth Everything you own minus everything you owe, measured at one moment in time. Net worth is the only measure that cannot be improved by moving money between your own accounts. Paying principal lowers cash and lowers debt by the same amount, so it leaves net worth unchanged at that instant while changing its composition and its liquidity. Over time the plans do diverge, through interest not paid on one side and returns earned on the other. That divergence is what the comparisons here measure, and it is different from the balance sheet reshuffle that happens the moment a payment is made. Formula: net worth = assets - liabilities ### Nominal rate (also: stated rate, quoted rate, annual rate) The annual rate as quoted, before accounting for compounding within the year. A mortgage quoted at 6.5% charges 6.5% divided by 12 each month. The nominal rate is a convention for dividing, not a statement about what a year actually costs. The word also has a second sense in finance: nominal as opposed to real, meaning before adjusting for inflation. Both senses appear in this tool, and the page that uses one says which. Formula: periodic rate = nominal annual rate / periods per year ### Opportunity cost The value of the next best use of a dollar, which is what you give up by committing it somewhere. A dollar of extra principal earns a certain return equal to the loan rate, by removing interest that would otherwise be charged. The same dollar invested earns an uncertain return. Comparing them means comparing a known number with an assumption, which is why the assumed return is an input here rather than a constant. Opportunity cost also applies to cash sitting at closing. A larger down payment removes interest and also removes whatever that cash would have done elsewhere, including its value as a reserve. ### Origination fee A lender charge for creating the loan, usually quoted as a percentage of the amount borrowed. An origination fee of 1% on a $300,000 loan is $3,000 due at closing. Unlike discount points, it does not buy a lower rate; it is simply the price of the loan. It can be paid in cash, financed into the balance, or offset by a lender credit that comes with a higher rate. All three show up differently on a closing statement and identically in your lifetime cost, which is what the break-even calculations here compare. Formula: origination fee = loan amount * fee percentage ### Pareto frontier (also: efficient frontier, Pareto front) The set of options that no other option beats on every objective at once. When configurations are scored on several objectives, most of them are dominated and can be discarded without any value judgment. What remains is the frontier, where improving one objective necessarily costs you another. Reporting the frontier instead of a winner keeps the tradeoff visible. Collapsing several objectives into one score requires weights, and those weights are a preference about your life rather than a property of the loan. ### Payment frequency How often a payment is made, which sets the periodic rate and the number of periods in the loan. Frequency enters the arithmetic in two places at once: the annual rate is divided by the number of periods per year, and the term is multiplied by it. A 30 year monthly loan is 360 periods at one twelfth of the annual rate. Paying more often, by itself, changes very little. What changes results is paying more per year, which is why an accelerated biweekly plan saves interest and a plan that merely splits the same 12 payments does not. ### Periodic rate (also: monthly rate) The interest rate applied in one period, obtained in US mortgage convention by dividing the annual rate by the number of periods per year. At 6.5% annual with monthly payments the periodic rate is 0.065 / 12, which is 0.00541667. That number multiplies the outstanding balance to produce each interest charge, which is why $300,000 accrues $1,625 in its first month. Note that this convention means twelve monthly charges compound to slightly more than the quoted annual rate. The effective annual rate captures that difference. Formula: periodic rate = annual nominal rate / periods per year 6.5% a year with 12 payments gives 0.0054166667 per month. ### PMI (also: private mortgage insurance, mortgage insurance) Insurance that protects the lender against default, commonly required when the loan exceeds 80% of the value of the home, and paid by the borrower. PMI is a cost of the loan that protects the other party. It buys the borrower nothing except access to a loan with a smaller down payment, which is a real benefit even though the coverage is not yours. It is not interest. This tool tracks PMI inside the monthly housing payment and keeps it out of the interest totals, because it does not accrue on the balance and it stops when the loan to value threshold is reached even though the loan continues. Formula: monthly PMI = original loan amount * annual PMI rate / 12 ### PMI cancellation The point at which mortgage insurance ends, based on the loan reaching a threshold percentage of the original value of the home. Two mechanisms exist for a conventional loan. A borrower may request cancellation at 80% of the original value, and the servicer must terminate automatically at 78% based on the original amortization schedule, provided payments are current. Extra principal moves the balance down faster and therefore pulls the request date forward, and cancellation based on appreciation rather than payments usually requires a new appraisal. Some loan programs carry insurance for the life of the loan and never cancel. Formula: cancellation balance = original home value * threshold percentage ### Prepayment Paying principal ahead of schedule, either as a larger recurring payment or as a one time amount. Prepaying buys a certain, immediate reduction in future interest at the loan rate. That is the closest thing to a risk free return available to a borrower, and it is the benchmark against which any alternative use of the cash is measured. It is paid for in flexibility. The money cannot be recovered without a sale or a new loan, and the scheduled payment does not fall, so a prepayment does not help next month cash flow. ### Prepayment penalty A fee charged by some loans for paying off or paying down the balance ahead of schedule. Penalties are typically written as a percentage of the amount prepaid or a number of months of interest, and they usually apply only for the first few years. Many mortgages have none, and several loan types are barred from carrying one. A penalty changes the arithmetic of prepaying and of refinancing, since both trigger it. This tool does not model penalties, so if your note has one, the interest saved shown here is larger than the amount you would actually keep. ### Present value (also: PV) What a future amount is worth today once it is discounted at a chosen rate. Present value is the inverse of compounding. If money grows at 7% a year, then $1,000 arriving in ten years is worth about $508 today, because $508 growing at 7% would produce it. Every comparison of amounts at different dates rests on this idea. Comparing a payment made in year 1 with one made in year 25 without discounting treats them as equal, which they are not. Formula: PV = future amount / (1 + r)^n ### Present value of an annuity What a stream of equal periodic payments is worth today, discounted at the periodic rate. A mortgage is an annuity seen from the lender side. The amount they hand over at closing is exactly the present value of the payments you promise, discounted at the loan rate, which is why the payment formula is this one rearranged. The same expression prices the value of a payment saving. A refinance that lowers the payment by $200 for 240 months is not worth $48,000; it is worth the present value of that stream. Formula: PV = payment * (1 - (1 + r)^-n) / r Rearranging for payment gives the level payment formula. ### Principal The amount of money still owed on the loan, and the portion of each payment that reduces it. The word carries two senses that the schedule keeps apart: the outstanding balance, and the slice of this payment that goes to reducing that balance. Interest is charged on the first; the second is what shrinks it. Principal paid is not an expense. It moves money from your cash into your equity, which is why an amortization table is a record of conversion as much as of cost. ### Property tax An annual tax levied by local government on the assessed value of the property, usually collected monthly through escrow. Property tax is a cost of owning that continues after the mortgage is gone. It is typically reassessed periodically, so it tends to rise with the value of the home and with local rates, independent of anything happening to your loan. It never enters interest calculations here. Prepaying the mortgage does not reduce it, which is one reason the monthly housing payment and the loan payment are kept as separate numbers throughout the tool. Formula: monthly property tax = assessed value * annual tax rate / 12 ### Rate and term refinance A refinance that replaces the existing loan with one of the same balance at a different rate, term, or both, with no cash taken out. Only the financing changes: the balance carries over, plus any costs you choose to roll in. Lenders usually price these below cash-out loans because the loan to value ratio does not rise. Whether it saves money depends on the term chosen as much as on the rate. Keeping the remaining term captures the rate improvement; restarting a full term also stretches the debt, which lowers the payment for a reason that is not a saving. ### Real value (also: inflation adjusted, real terms, real dollars) An amount expressed in constant purchasing power, after removing the effect of inflation. Nominal figures answer how many dollars; real figures answer how much those dollars buy. A payoff amount 25 years out is a large nominal number and a much smaller real one. Mixing the two produces confident errors. Comparing a nominal home value in year 30 with a nominal dollar spent today overstates the gain by exactly the inflation that occurred in between. Formula: real amount = nominal amount / (1 + inflation rate)^years ### Refinancing Replacing an existing loan with a new one, which pays off the old balance and starts a new schedule. A refinance is a purchase of new financing, with its own costs. The decision is therefore a comparison of two whole paths from today forward: what you would pay and owe on the current loan, against what you would pay and owe on the new one including its costs. Because the new loan has its own term, the payment can fall for two different reasons that are easy to confuse. This tool shows both break-evens for that reason, and the complete one is the one that accounts for a restarted clock. ### Rent vs buy A comparison of two households with the same cash making opposite choices, measured on unrecoverable costs and on net worth at a horizon. Comparing rent with a mortgage payment compares a cost with a mixture of cost and saving. The honest comparison puts unrecoverable costs on both sides: rent for one, and interest, taxes, insurance, dues, maintenance and transaction costs for the other. The second half is opportunity cost. The renter invests the down payment and closing costs that the buyer spent, and whoever pays less each month invests the difference, so both paths are fully specified and net worth can be compared at any month. ### Return on assets (also: return on asset, unlevered return) The return measured against the full value of the asset, ignoring how it was financed. A house that rises from $400,000 to $412,000 returned 3% on the asset. That figure describes the property and is comparable across buyers regardless of their down payments. It is the number to use when asking whether real estate performed well. The number that describes your own outcome is return on equity, which the financing amplifies. Formula: return on asset = change in asset value / beginning asset value ### Return on equity (also: levered return, return on capital invested) The return measured against your own capital rather than against the value of the asset. With $80,000 down on a $400,000 home, a 3% rise in value is $12,000, which is 15% of your capital before costs. The same arithmetic runs backward: a 3% fall is a 15% loss on capital. The gap between this and return on assets is leverage, and it is not a free improvement. The loan charges interest every month regardless of which way the asset moved. Formula: return on equity = change in equity / beginning equity ### Rollover effect (also: snowball effect, payment rollover) Redirecting a freed minimum payment to the next debt when an account is paid off, so the total budget stays constant while the extra payment grows. This is the engine behind every payoff strategy, and it is independent of the order chosen. Each closure adds its minimum to the pool, so the amount attacking the next target grows with every account retired and the pace accelerates toward the end. The effect disappears if the freed payment is absorbed into spending. A plan measured here assumes the budget is held constant, which is an assumption about behavior rather than arithmetic. Formula: extra available after a payoff = previous extra + minimum of the closed debt ### Selling costs Everything a sale consumes before the seller sees any money: commission, seller closing costs, repairs and concessions. Selling costs commonly run from 6% to 10% of the price once concessions and repairs are counted. They are charged on the value of the home, so they grow as the home appreciates. They are the main reason a short holding period is expensive. Buying and selling within a few years pays both sets of transaction costs out of a small amount of appreciation. Formula: selling costs = sale price * commission rate + seller closing costs + repairs + concessions ### Sensitivity analysis Sweeping one input across a range while holding everything else fixed, to see how much the conclusion depends on it. A single point estimate hides how fragile it is. Sweeping the rate, the appreciation assumption or the expected return shows whether an answer holds across the plausible range or flips inside it. It also ranks the assumptions. If the conclusion is flat across a wide band of one input and reverses on a small change in another, you know which number is worth refining. ### Tax on investment gains (also: capital gains tax, tax on gains) Tax charged on the profit from selling an investment, which this tool applies as a single flat rate at the end of the horizon. Real tax treatment depends on the account, the holding period, your bracket, your state and the year you sell. Modelling that faithfully would require more about your situation than a browser simulation should ask for. The tool instead applies one flat rate to the gain at the end of the horizon, so the comparison between prepaying and investing is not accidentally tilted by ignoring tax entirely. Set the rate to zero to see the pre tax picture. Formula: after tax value = contributions + (ending value - contributions) * (1 - tax rate) ### Term (also: loan term, amortization period) The number of periods over which a loan is scheduled to be repaid. Term trades monthly cash against lifetime cost. A longer term spreads the same principal over more payments, so each one is smaller and more of the early ones is interest. A shorter term does the reverse. It is also the input that most often confuses a refinance. Comparing a new 30 year loan with the 25 years left on the old one compares two different products, not two rates. Formula: n = years * payments per year ### Term restart (also: resetting the clock, term reset) Taking a fresh full term on a refinance, which lowers the payment partly by stretching the remaining debt over more months. Five years into a 30 year loan, refinancing into a new 30 year loan means paying for 35 years in total. The payment drops for two reasons at once, and only one of them is the rate. The naive break-even cannot see this, because it looks only at the payment difference. The complete break-even can, because it counts the balance still owed at every month, and it is the reason a refinance with an attractive payment can end up costing more. ### Time value of money The principle that a dollar today is worth more than the same dollar later, because today dollar can be put to work. Everything about discounting, present value and rates of return follows from this one idea. Amounts at different dates are not comparable until they are moved to a common date at some rate. It is also why the timing of an extra payment matters so much. A dollar applied in month 1 removes interest for 359 more months; the same dollar in month 300 removes interest for 60. Formula: value at time t = value at time 0 * (1 + r)^t ### Total interest (also: lifetime interest, interest paid) The sum of every interest charge over the life of a loan, which depends on the balance you carry and how long you carry it. On $300,000 at 6.5% over 30 years the total is about $382,637, so about $1.28 of interest accompanies every dollar borrowed. The number is large because the balance stays large for many years, not because the rate is unusual. It is a useful comparison between two paths for the same loan, and a poor single objective on its own. Total interest always falls when the term shortens or a prepayment lands, even when the cash required to do it had a better use. Formula: total interest = sum of interest_t over every row of the schedule ### Unrecoverable cost Money spent on housing that never comes back to you, such as interest, taxes, insurance, dues, maintenance and transaction costs. Rent is entirely unrecoverable. Owning has unrecoverable costs too, and they are not small: interest, property tax, insurance, association dues, maintenance, and the closing and selling costs paid at each end. Only the principal portion of a payment is recoverable, because it becomes equity. Comparing rent with total unrecoverable cost is the comparison that puts the two choices on the same terms. Formula: unrecoverable per month = interest + property tax + insurance + HOA + maintenance ### Velocity banking (also: HELOC chunking, mortgage acceleration, all-in-one loan) Drawing lump sums from a line of credit to pay mortgage principal, then routing income through the line to repay it, repeating the cycle. The chunking half is a rate trade. Interest avoided on the mortgage and interest charged on the line follow the same amount over the same falling profile, so the two cancel except for the gap between the rates. Borrowing at 9% to repay 6.5% loses money, and repeating the cycle repeats the loss. The half that does work is the float: income sitting against the line instead of in an account. That benefit has nothing to do with the lump sums and would arrive without them. Demonstrations compare the strategy against making minimum payments, which is not a comparison: almost the whole gap is the extra principal, which you could pay directly. It also converts fixed-rate debt into variable-rate debt secured by your home. ### Wealth accumulation Growth in net worth, which only comes from money you did not have before, not from moving your own money between accounts. Three things create wealth for a homeowner: appreciation of the property, interest not paid because the balance was reduced, and returns on whatever was invested instead. Paying principal is not one of them at the moment it happens; it is a transfer from cash into equity. The distinction matters because an equity chart rises even in a flat market. Reading that rise as wealth created double counts the cash that produced it, and it is the most common confusion this tool tries to prevent. ### XIRR An internal rate of return computed from the actual dates of the cash flows rather than from evenly spaced periods. Monthly IRR assumes every flow lands exactly one month apart. XIRR uses the real dates and a 365 day year, which matters when a closing, a lump sum and a sale fall on irregular dates. It carries the same cautions as IRR: several roots are possible when the signs of the flows alternate more than once, and no rate exists at all when the series never turns positive. Formula: find r such that: sum over i of CF_i / (1 + r)^((d_i - d_0) / 365) = 0