How Extra Mortgage Payments Affect Amortization!

Mortgage amortization is how a home loan is paid down: The debt diminishes slowly at the beginning and then rapidly toward the end. At first, most of each mortgage payment goes toward Interest. In later years, most of the payment reduces debt. The gradual shift from paying mostly Interest to mostly debt payment is mortgage amortization at work.

Out of each mortgage payment, you are paying Principal & Interest as well as Taxes & Home Owners Insurance (escrow). Below is an example of amortization on a loan with the Principal & Interest parts of each payment.

As you can see, in the beginning, you are paying more Interest than you are Principal. Each month, Interest is charged on the Principal balance aka your balance owed. The key to limiting how much interest you pay is making extra payments to the Principal. Even a single extra payment made each year can reduce the amount of interest and shorten the amortization, as long as the payment goes towards the Principal, and not the Interest. Make sure your lender processes the payment this way! I use mobile banking and pay my mortgage online. In the "Loan Servicing" Section of the web page, it gives me the option to select where any additional funds I pay over the mortgage goes to. I ALWAYS choose Principal.

At one point, I was paying ahead on my mortgage and making extra monthly payments to be ahead. In doing so, where interest is charged on the principal balance each month, I was paying more interest than I needed to! Now, instead of paying months ahead, I use the additional funds to put towards the Principal so the next months payment that comes due has less interest factored in because my Principal balance is lower!

I cannot stress enough how important putting extra funds towards your mortgage Principal is. Even an extra $25 each month makes a dent in the large amount of interest you will pay over the life of your loan. There are Mortgage Calculators you can use online for free. With using a mortgage amortization calculator, you can:

• Find out how much total interest you would pay over the life of a loan.

• Determine the remaining loan balance in any given month.

• Figure out how much of each month's payment goes toward principal (debt reduction) and interest.

• Compare the total cost of a 30-year loan versus a mortgage with a shorter term, such as 15 years.

• Know when you're approaching 20% equity, so you can cancel private mortgage insurance (as mentioned in previous blog)

For EXAMPLE:

On a $150,000 Fixed-Rate 30 Year Mortgage at 4.5% Interest Rate, if you make the minimum payments for the full 30 years you will pay in a total of $123,610.07 in INTEREST ALONE!!! That equates to paying a total of $273,610.07 for your $150,000 home.

Now... let's take a look at what an extra $50 each month towards the principal does:

• It takes your 30 Year term down to 25!

• It saves a total of $14,317 in Interest!

An extra $168 each month equates to 20 Year term and $36,000 in Interest savings!

This is all based on a 30 Year Fixed-Rate loan. That's why, as mentioned in my previous blog post, I highly suggest you to look at a shorter term if it fits within your budget. Doing a 20 Year vs a 30 Year term shortens that amortization schedule which means less interest paid in the long run. Now imagine doing the same and paying that extra to the principal each month on a 20 year term that already has less interest charges to begin with! It drastically reduces your interest costs!

I am a licensed Real Estate Broker in NC and would love to answer any questions you may have! Feel free to message me through This Organic Love's page or you can reach me at KimWeaver@kw.com.

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