Many people do not understand how mortgages work as far as pre-paying. If you can increase your payment during the first few years of your loan, you can save an awful lot of interest and pay your mortgage off early! To understand how this works, you need to ask your lender for an amortization schedule (this is a schedule of how much of your payment goes to principal and how much to interest on a monthly basis) or go out on the web and look for one of the many amortization calculators that are available for free. Let's take a look at how this works:
Although your monthly principal and interest payment stays the same over the 30 years, every time you make a payment the amount you owe is decreased slightly
On a loan of $100,000 at 8% for 30 years, the monthly principal & Interest payment is $733.76 per month. The breakdown of the first five payments is:
Principal Interest Loan Balance
1 67.09 666.67 99932.91
2 67.54 666.22 99865.37
3 67.99 665.77 99797.38
4 68.44 665.32 99728.94
5 68.90 664.86 99660.04
If you pay your $733.76 per months as scheduled, after five payments you will owe $99,660.04. If you pay an additional $67.54 with your first payment, you save $666.22 in interest and your balance is now $99,865.37 - it's like making two payment for the cost of the principal only! If you paid an additional $272.87 (the amount of the principal for payments 2-5) you would save $2,662.17 in interest and you will pay your mortgage off four months earlier than scheduled.
For every additional principal payment you can make, you eliminate one month of payments off the end of the loan and you save 30 years worth of interest on that additional payment amount!
By pre-paying an amount equal to a month's principal does NOT allow you to skip the next scheduled payment - the extra payment is applied directly to the principal and reduces the number of payments at the end of the loan.
As you can imagine - since the amount of principal goes up slightly each month and the amount of interest goes down slightly, paying extra principal at the beginning of the loan reduces your loan the fastest, saves you the most interest, and can be done for a lesser amount than later in the loan when the principal payments are higher!
So, get yourself an amortization schedule - and each time you pay that little bit of extra principal and scratch off the payment due for that extra amount - think kindly of this advice!
I know this may sound a little confusing to some, if you have any questions, please feel free to ask!
As always BE INFORMED and CHECK BACK HERE OFTEN!
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