Mortgage Acceleration Primer
Amortization Schedules
When a mortgage is originated, the amount to be borrowed,
the interest rate and term are defined in an agreement between the mortgage
company and the borrower. With this information the mortgage company calculates
the amount of the payment. After the payment is calculated, they can then
calculate an amortization schedule. The amortization schedule is simply a
schedule of principal and interest payment amounts. The following
is a sample portion of an amortization schedule generated by Mortgage Minder.
This schedule was based on a 100,000 dollar loan at 9.5 percent for 30 years.
|Pm|Date | Pmt Amt| Prin | Int |Tot. Prin| Tot. Int|
Balance |
| 1|Oct96| 840.85 | 49.19| 791.67| 49.19 | 791.67
| 99,950.81|
| 2|Nov96| 840.85 | 49.58| 791.28| 98.76 | 1,582.94|
99,901.24|
| 3|Dec96| 840.85 | 49.97| 790.88| 148.73 | 2,373.83|
99,851.27|
| 4|Jan97| 840.85 | 50.37| 790.49| 199.10 | 3,164.32|
99,800.90|
| 5|Feb97| 840.85 | 50.76| 790.09| 249.86 | 3,954.41|
99,750.14|
| 6|Mar97| 840.85 | 51.17| 789.69| 301.03 | 4,744.10|
99,698.97|
| 7|Apr97| 840.85 | 51.57| 789.28| 352.60 | 5,533.38|
99,647.40|
| 8|May97| 840.85 | 51.98| 788.88| 404.58 | 6,322.26|
99,595.42|
| 9|Jun97| 840.85 | 52.39| 788.46| 456.97 | 7,110.72|
99,543.03|
|10|Jul97| 840.85 | 52.81| 788.05| 509.77 | 7,898.77|
99,490.23|
|11|Aug97| 840.85 | 53.22| 787.63| 563.00 | 8,686.40|
99,437.00|
|12|Sep97| 840.85 | 53.64| 787.21| 616.64 | 9,473.61|
99,383.36|
Take a look at the first payment, particularly the "Payment", "Principal" and "Interest" columns. Out of that 840 dollar payment only 49.19 was applied towards the principal amount of the loan. This means that after the 840.85 payment, the amount owed is still 100,000 minus 49.19 or 99,950.81 as shown in the "Balance" column. Now notice the rest of the payments and the way they are broken down. The payment stays the same, but the principal and interest amounts change. Each payment, the principal amount increases and the interest amount decreases. That is because the interest is calculated on the remaining unpaid balance of the loan, which is constantly being reduced (ever so slightly in the beginning) by the principal amount of the payment. At some point the principal amount of the payment will be more than the interest amount. One would think that this point would be the middle of the term, or in this case around the 180th payment. This is not true. In fact, with this loan the principal amount of the payment exceeds the interest amount around the 273rd payment. See for yourself.
|Pmt|Date |Pmt Amt| Prin | Int |Tot. Prin |
Tot. Int | Balance |
|271|Apr19| 840.85| 413.53| 427.33| 46,435.41|181,436.08| 53,564.59|
|272|May19| 840.85| 416.80| 424.05| 46,852.21|181,860.14| 53,147.79|
|273|Jun19| 840.85| 420.10| 420.75| 47,272.31|182,280.89| 52,727.69|
|274|Jul19| 840.85| 423.43| 417.43| 47,695.73|182,698.32| 52,304.27|
|275|Aug19| 840.85| 426.78| 414.08| 48,122.51|183,112.39| 51,877.49|
|276|Sep19| 840.85| 430.16| 410.70| 48,552.67|183,523.09| 51,447.33|
|277|Oct19| 840.85| 433.56| 407.29| 48,986.23|183,930.38| 51,013.77|
|278|Nov19| 840.85| 437.00| 403.86| 49,423.23|184,334.24| 50,576.77|
|279|Dec19| 840.85| 440.45| 400.40| 49,863.68|184,734.64| 50,136.32|
|280|Jan20| 840.85| 443.94| 396.91| 50,307.63|185,131.55| 49,692.37|
|281|Feb20| 840.85| 447.46| 393.40| 50,755.08|185,524.95| 49,244.92|
This is also almost the point where half of the loan is paid. That means it would take you over 23 years to pay off the first half this loan, which means the other half is paid in a little over 7 years! Now look at the end of this loan.
|Pmt|Date |Pmt Amt| Prin | Int |Tot. Prin | Tot.
Int | Balance |
|349|Oct25| 840.85| 764.94| 75.92| 91,175.29|202,282.83| 8,824.71|
|350|Nov25| 840.85| 770.99| 69.86| 91,946.28|202,352.69| 8,053.72|
|351|Dec25| 840.85| 777.10| 63.76| 92,723.37|202,416.45| 7,276.63|
|352|Jan26| 840.85| 783.25| 57.61| 93,506.62|202,474.06| 6,493.38|
|353|Feb26| 840.85| 789.45| 51.41| 94,296.07|202,525.47| 5,703.93|
|354|Mar26| 840.85| 795.70| 45.16| 95,091.77|202,570.62| 4,908.23|
|355|Apr26| 840.85| 802.00| 38.86| 95,893.76|202,609.48| 4,106.24|
|356|May26| 840.85| 808.35| 32.51| 96,702.11|202,641.99| 3,297.89|
|357|Jun26| 840.85| 814.75| 26.11| 97,516.86|202,668.09| 2,483.14|
|358|Jul26| 840.85| 821.20| 19.66| 98,338.05|202,687.75| 1,661.95|
|359|Aug26| 840.85| 827.70| 13.16| 99,165.75|202,700.91|
834.25|
|360|Sep26| 840.85| 834.25| 6.60|100,000.00|202,707.51|
0.00|
The payments are still the same, but the principal and interest amounts have switched places. Now the majority of the payment is showing in the principal column and the smaller amount in the interest column. Again, this is because the interest is calculated on the unpaid amount of the loan. Toward the end of the loan, the unpaid amount is smaller therefore the amount of interest paid for those payments are smaller as well.
Mortgage Acceleration
The idea of mortgage acceleration is to pay an additional
amount towards the principal portion of the loan to reduce the principal
and reduce the amount of interest charged for the next payment cycle. I
think you will be surprised when you see the difference that just a few
dollars each month can make.
Using the same loan as an example, would you believe that you can save over FIFTEEN THOUSAND dollars over the term of the loan by sending only 10 dollars a month extra with your payment! You will also cut 1.75 years or 22 payments off the term of the loan. If you pay an extra 25 dollars each month, you save almost 33,000 dollars in interest and cut the term to 26 years! How about 100 dollars extra each month? You'll save over 80,000 dollars in interest and pay the loan off 10 years early!
Now for the trick question of the day. The normal payment for this loan is 840 dollars. How much do you think you would have to send each month in order to pay the loan off in half the normal term? Double the payment to 1680 dollars? Maybe a little less? Would you believe that if you paid an extra 205 dollars each month, you will pay this loan off in 15 years!! And in the process, save over 115,000 dollars in interest! YES, that IS 115 THOUSAND dollars! Now how do you get started?
Alternatives
There are companies that provide mortgage acceleration
programs for a fee. The idea that seems to be most popular is the bi-weekly
payment plan. Basically, instead of making a 600 dollar payment every month
to your mortgage company, you would make a 300 dollar payment every two
weeks to the company providing the service. They hold the half payment
until they have the next half and then they send the whole payment to the
mortgage company. After six months, you have paid a dollar amount equal
to six and one half payments. The company then sends this extra half payment
to your mortgage company to be applied towards the principal which can
cut a significant amount off the term of the loan, and save you a great
deal in interest. This is a popular plan for some people mainly because
the details are handled for you. Because it is the same amount every two
weeks, it is hard to realize that you actually paid an extra half payment
after six months. Some companies will automatically deduct the payment
from your checking account which makes it even easier. But there is a catch!
These companies do not provide this service for free. They charge a substantial
(in my opinion) fee for helping you save money. I do not claim to be an
expert on this plan or the companies that provide the service. I checked
out a couple of them and after I saw the 250 to 500 dollar fee associated
with the service, I decided that I would do it on my own. In fact, I went
a couple of steps further and created Mortgage Minder to help others do
the same.
You Can Do it Yourself
The fact is, you do not need anyone to send your
money to the mortgage company for you. You have probably been doing a fine
job of that until now. So why change. It is going to be up to you to decide
how much and when you want to send extra money to be applied to the principal
portion of your mortgage. Mortgage Minder software is a great tool to help
you decide the amount that is right for your budget and goals.
If you decide to send extra principal payments yourself, there are a couple of things that you should know. First of all, make a call to the mortgage company and ask them exactly how they want to receive the extra payments. For instance, some mortgage companies require you to send the payment separate from your normal payment. Others require a written notice of where you want the money applied, and still others have minimum amounts. The point is, there are thousands of lenders with thousands of rules, so to be on the safe side, call. It should only take a couple of minutes and will save you a hassle down the road. A week or so after they receive the payment, call again to make sure the extra amount went to the principal portion of your loan. Then it is a good idea to check again every few months just to make sure. Another thing you should know is that some lenders charge you a fee for paying your loan off early. When you call, ask if your particular mortgage has such a fee. If so, the fee is probably still far less that the amount you will have saved in interest.
Get Started Now!
Now all you have to do is decide how much you can
send each month. Decide now and get started right away. The longer you
wait, the more money you could have saved. For example, if your loan was
like the example we have used throughout this document, you will save almost
83,000 dollars by paying just 100 dollars extra each month, IF you start
with the first payment. Now what if you waited a year or two and then started
the extra payments? Well, if you started the extra payments on the second
year, you will still save over 76,000 dollars. So that means the extra
1200 dollars in payments that you would have made the first year would
have been worth 7,000 in interest savings. If you wait until the second
year, your savings drop to just under 71,000 dollars, which is still good,
but not as good as if you start with the first payment. The point here
is to get started as soon as possible. The sooner you start, the more you
will save.
Mortgage Minder
Mortgage Minder is a software package for Windows
95/98/NT4 designed to help you calculate the right amount to send as an extra
principal payment. With Mortgage Minder, you can try several scenarios
and see instant feedback to help you decide what plan is right for you.
For more information about Mortgage Minder, feel free to send
me an e-mail , download the demo, or check out the on-line
tour.
This is an out-dated link, please visit the NEW Mortgage Minder home at http://Mortgage -Minder.com
Updated 19 July 2000 13:43 -0700