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The Shocking Truth About Mortgage Math

I feel like a nerd as I read the title of this post, but trust me this is a good one. If you’re new here, let me explain. Back in 2012, I paid off my $86,000 mortgage in 2 years. Fast forward to 2014, I relocated to my hometown. I just bought a new condo and I’m ready to eliminate this mortgage ahead of schedule as well!

At my closing earlier this month, the attorney handed me the AMORTIZATION SCHEDULE for my loan. Even before taking a glance at it, I sighed and rolled my eyes. Basically, it’s just a reminder of how long and how expensive it is to pay off your mortgage the traditional way, whether that’s 15 or 30 years.

Let me first provide you with some details on my loan:

Starting balance: $225,200

Loan start date: October 15, 2014

Term: 3o years

Interest rate: 4.45%

 

Here’s the depressing part. My first payment of $1,134.37 is made up of only $299.25 principal. The remaining $835.12 is interest. That’s how it works with conventional mortgages. You pay more interest at the beginning of your loan and less interest at the end of your loan.

Now, I’m sure you’re curious about your own situation. If your amortization schedule isn’t handy, there is an AWESOME tool that I suggest you check out. It’s Dave Ramsey’s free mortgage calculator. I consulted this all the time during my first mortgage payoff. If you know your starting loan balance, loan start date, term and interest rate– the calculator will create an amortization schedule for you. If not, there’s a way to figure it out using your latest statement from your mortgage company.

I played around with this calculator for a few minutes today and the numbers were staggering. As I mentioned, my mortgage starting balance is $225,200. If I pay my mortgage with interest for 30 years, I’ll pay $408,376 for that home. WOW! That’s reason enough to prepay the mortgage.

Now, here’s some more encouraging news. Sending extra payments makes a difference and those payments don’t necessarily have to be big to have a big impact!

Here are some examples with my loan:

Paying an extra $100 a month shaves 4 1/2 years off the loan and saves $31,000 in interest.

An extra monthly payment of $300 takes 10 years and 3 months off the loan and saves $69,000 in interest.

Finally, paying an extra %500 a month shaves 13 years and 10 months off the loan and save $92,000 in interest.

So, obviously with my previous mortgage, I paid WAY MORE than an extra $500 a month to destroy it in 2 years, but my circumstances have changed a bit. I don’t think a rapid repayment is realistic this time. However, I’m working to figure out how long it will take. I’m guessing about 7 years, but I have a few tricks up my sleeve to speed things up!

My message with this post is that every bit counts. Once you’ve funded your 401k (up to the company match) and your Roth IRA, you may be looking for a place to put your money to work. I found that prepaying the mortgage was a very rewarding thing to do with my extra money because it’s a sure thing– or at least as close to a sure thing as you’re going to get. I’m exciting to begin prepaying my new mortgage and sharing the journey with you!

After reviewing your amortization schedule, let me know what you think. Does it inspire you to find ways to save more and spend less?

I’m on Facebook, so let’s stay connected!

 

 

 

 

 

3 comments

  1. Wow, very excited to learn how to pay off my mortgage, too!

  2. This seems interesting. It really surprises me how we often mistake the amount or figures when it comes to loans, and I really appreciate everyone who takes time to make the understanding part of loans easier to absorb.

    Thanks for this post.

  3. Thanks for getting the word out there. So your monthly payment without escrow is $1,134.37. Let’s say you did the exact same amount financed for a 15 year mortgage, your rate would be around 3.5% (assumption), your payment would jump up to $1,609.92 (or an extra $475.55) but you would only pay $64,584.79 in interest over the life of the loan (assuming you make no extra payments). Compare that to the $183,174.87 you’d be paying in interest for a 30 year, a 15 year sounds great. I know you mentioned you paid over $500 extra per month on your previous mortgage, I am assuming you can afford the extra $475.55 to be able to pay the 15 year loan. When you make your first payment on the 15 year, 59% of the payment goes to principle instead of an insignificant 20% when compared to the first payment on the 30 year loan. Moral of the story, always good to consider a lesser term mortgage because the amortization schedule is set up differently.

    Cheers,

    Angelo

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