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Mortgage Loan Amortization Tips

November 15th, 2006 at 01:13 pm

I didn't have much to blab about myself today so I figured I would be helpful instead. & give some tips on figuring out your mortgage, or any loan, and how maybe you can pay it off early.

Anyway, a while back I went through some amortization tables and played with how much in extra payments, that I Can afford anyway, I should make on my mortgage to get the most benefit. Basically, what is the minimum amount I Can pay that will shorten the loan the most? For me, paying an extra 11% was the best. I am not sure how it differs on different variables. But another $100/month was doable and maybe shortened it a few years. An extra $150 shortened it 6 or 7 years. $200 only shortened 8 years. I said why bother then $150 is like the sweet spot. I like round numbers so I didn't dig much deeper than that.

I did the extra $150 thing for a while, but that has been out the window since my last maternity leave. We took a big hit on our cash and I am waiting to have $10k in the bank to resume payments again. I am guessing next summer though so not much longer. I then updated my amortization schedule with some future thinking. $150 extra/month for the next 2 years. After that I assume with raises and dh bringing in some money I could really afford $200/month extra for the following 2 years. At that point the youngest will be in 1st grade and odds are dh will have at least a part-time job. So I assume $500/month extra at that point. There is a big difference between my attitude now with kind of struggling to get ahead, vs. when dh can bring home a significant check and our goal then will be to pay off the mortgage as fast as we can. With this plan we will payy off the mortgage in 2022, or Big Monkey's first year in college. That's pretty much how I came up with the $500/month extra amount.

The beauty of making early mortgage payments is not only you are paying down your principal, but you are being charged less interest over time as a result. My current plan has $100k in early payments but also saves $85k in interest over the life of the loan. Hey that is $85k I Rather not spend if I do not need to. Even just sticking with the $150/month saved $65k/month interest. So that is really the sweet spot. That would take 4 more years to pay though, but still shaves 7 years off the original loan.

OF course, there is always the argument that if you have money in the bank earning more, that it is best not to pay off low-interest debt. For now my $215k loan at 5.75% is way beyond my measly few thousand in the bank. But certainly something I will re-evaluate as our means change. I am trying to find that balance where we are saving, paying down the mortgage, and maxing our retirement contributions. IF we can do all 3, great. If not, that is where priorities have to be made. But I know money going to my mortgage every month is money well spent and will not go anywhere else once it is gone. A forced savings plan in a way. Trying to balance all 3 is a challenge, but I have never been a fan of debt, and I decide not to be a fan of my mortgage either. No doubt needed it to get into a house in our region in our lifetime, BUT doesn't mean I won't try my best to pay it off long before it is due. An extra $150/month is pretty simple and doable and saves a lot of interest.

Anyway, I have always felt at an advantage because when I applied for a loan and as I study my loans, I have lots of tools at my fingertips as an accountant. But I Decided I would look for some free tools onnline and share, so you can evaluate your loans and do the same. The same principles should apply to auto loans and such.

First I will go through the basics for the really ambitious, and then share the tools for those who just want to know the bottom line.

How amortization works is you take your current loan balance and multiply that by the interest rate. Divide that by 12 (12 months) and that is your interest payment for the month. Take your total monthly payment and subtract the interest portion, the rest is applied to principal. Subtract the principal paid from the beginning loan balance and that is your new loan balance. You can set up columns in excel to calculate your amortization. Maybe a column with date (month and year), monthly payment, principal portion, interest portion, and balance. The sum of the principal and interest portion should always equal your payment for the month. Put in your calculations for a month or 2 and just copy it down the spreadheet until the remaining balance is 0. IT is also a good idea to add a column for extra payments, then you can throw in extra payments evenly for the life of the loan, or just times when you think you can swing it. You can see the length of the loan shorten as you play with it, and you can get to a point where you are happy.

This is the hard way and I wouldn't recommend it overall, but it sure gives you an understanding of how it all works out.

I actually found this website which had a pretty good amortization tool: http://www.hsh.com/calc-amort.html

The top part of the calculator you put in all of your variables. This is good if you are evaluating a new loan - it will calculate your payment. On the bottom portion you can add extra payments too. The resulting amortization table is really informative - says how much you save in interest with prepayments, etc. You can play with it and see what your sweet spot is.

However, on the above tool, though great, you can't customize to make extra payments here and there, and change amounts over time, etc. What works great for that is an excel amortization template. Here is a free one, you will have to scroll down to the "loan amortization schedule": http://www.score.org/template_gallery.html

You just enter the basic loan info, and it will calculate the monthly payment for you. & in the spreadsheet you can change the additional payments line by line if you like. I understand that this template works in open office as well. I haven't tried, but read it does.

And beyond all that read this super cool article I found. http://www.mortgagenewsdaily.com/7112005_Payoff_Mortgage_Amo...

I don't know anyone, besides my accounting friends anyway, who even knows or cares about all this stuff. But I figured if I shared here it might actually be appreciated. Wink

& just FYI - this is all in regards to fixed rate mortgages. It does not work the same on ARMS - don't even ask - I have no clue how those work but I always hear scary words like "negative amortization" and such when it comes to other products. I am not sure how much you can prepay principal on some of those ARMs. I tried to find some articles on the subject but it just confused me more...

6 Responses to “Mortgage Loan Amortization Tips”

  1. PRICEPLUS Says:

    Great thought provoking post! Thank You!Smile

  2. fern Says:

    In addition to the amount of $ you decide to prepay, it also makes a big difference where you are in your loan cycle. In other words, making $100 extra in payments each month will have much more impact on your loan, and how much you pay in total for interest, if you are years 1 - 10 of your mortage as compared to if you are in years 20 - 30 of your mortgage. That's becus your total monthly mortgage payment, you're paying the greatest ratio of principal vs. interest in the earliest years.

    I have always prepaid my mortgage, becus tho it's just 6%, i really don't want any debt at all and it's worth the peace of mind to me to pay it off ahead of the 30 year schedule. A few months ago i committed to prepaying not just $100 or $200 extra monthly, but $400 extra. It's quite a lot, but i'm going to see if i can keep it up. If i do, i can pay the whole thing off in 7 years, or looked at another way, pay off a 30 year loan in 17 years.

    And prepaying the mortgage doesn't mean i am neglecting my retirement. I fully fund my IRA every year, and contribute 12% to my 401k. Next raise i get i'll raise that to 15%.

  3. monkeymama Says:

    Well, that is the thing for me. Today paying $150 can really neglect my retirement. But it all changes over time. I won't be so "poor" forever - hehe.

    You bring a good point though, late into a loan there is a lot less you can do. The earlier you start, the more you can save!!!!! I guess I Was aiming this post at those early in their mortgage. But no matter what check out the amortization and see if early payment can help, I guess.

  4. janH Says:

    Our mortgage allows us to apply any additional to our principal only, so that the balance goes down on what we owe on the principal. Is that the way all of them do it? Anyway, it is a LOT of interest money. Didn't realize how much you could save!

  5. monkeymama Says:

    Yes, that is what you want to apply extra payments to - principal. I think the article says to make sure that is where the extra payments go. I am not sure where else it would go - hehe. But I guess it is important to specify where you want it to go. My mortgage company just has an extra line item on their payment vouchers for "extra principal." & online they have a line item for that as well. Real easy. I have had friends have a harder time getting their banks to apply it properly though.

    I also like keeping my own amortization schedule because you figure amortization is complicated and mistakes easily made. I keep an eye that the bank balance matches mine, particularly when I make extra payments. I guess they know what they are doing - Wink - but you figure mistakes are sometimes made too.

  6. Haimdat Sawh Says:

    An amortization schedule may actually refer to the computation of a program's use of system resources in the computer science world. Amortization schedules can be calculated fairly quickly online by you or quickly faxed to you from the mortgage lender representative working your loan. An amortization schedule might show tax and insurance payments from a standard mortgage, if the tax and insurance are escrowed into the loan. An amortization schedule is something you must have a look at when purchasing a home to see if you really can afford the home over time.

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