Mortgage debt is perceived by many as an immovable thing that must be patiently paid down, one monthly installment at a time. While it’s absolutely necessary to pay the amount owed to your creditor, proactive homeowners decide for themselves exactly when they plan to wipe their home loan through accelerated amortization.
Amortization Schedule
An amortization schedule is a simple list of every payment that is owed on a loan agreement. Your lender will conveniently present you with this upon signing and closing a mortgage agreement. The schedule lists the date and amount of each installment, and breaks out the interest and principal portion for each. The final column usually shows the reduced principal balance after making that payment.
Don’t Leap Into Refinancing
It can be crushing for new home buyers to see their first mortgage statement and realize just how little of their payment actually goes to reducing the principle balance. The good news is that mortgage principal can be paid down anytime, even if your mortgage is ’fixed’.
As a mortgage broker I was often contacted by people wanting to refinance with the goal of paying off their loans at a faster rate over a shorter period of time. I was happy to inform them that there is absolutely no reason to refinance if you want to accelerate the amortization of your outstanding balance.
Amortization On Your Terms
Planning to have your mortgage completely paid off by retirement could be an important part of your cash flow strategy. Alternatively you may want to identify how additional principal contributions will shorten your mortgage commitment and free your resources for other needs. No matter the reason, accelerating mortgage amortization will save you interest.
You will need the help of a special mortgage calculator. Simply search online for ACCELERATE MORTGAGE PAYMENT CALCULATOR and select one that you are comfortable with. There will be hundreds to choose from and you shouldn’t have to subscribe or pay for them.
Accelerated Amortization Example
Let’s use a sample mortgage to demonstrate. Assume an opening balance of $200,000, fixed 30 year term, 4.5% interest rate. In each example below we’ll make additional monthly principal contributions of $100, $200, and $500 respectively.
Extra $100 – Save 5 Years
Extra $200 – Save 8 Years and 6 Months
Extra $500 – Save 14 Years and 9 Months
By experimenting with a mortgage calculator you can quickly identify the additional funds to apply to the principal to clear the mortgage when you want to. In this example, for as little as $100 per month the term can be reduced by 5 years. The time and interest savings are even greater with increased contributions.
Don’t feel shackled by the terms of your mortgage. Your lender can easily show you how to apply additional payments towards your mortgage principle balance, reducing your payback period and saving you money.
Do you make additional mortgage principle payments? How much time do you want to cut off your mortgage?
I would love to refinance, however my balance is too small to make sense. Instead a few years ago, I started to accelerate my payments by making additional principal payments.
Good to know KC. If we were gong to stay in this house the accelerated principal reduction would be a smart way for us to proceed.
We are paying $500 extra per month right now, but that will probably decrease if my job situation change. With the extra $500, we’ll be done in 15 years… That is such a long time.
That’s a long time to sustain a large additional contribution. Every payment is putting you in a much stronger position. Ironically, we’re about to begin the re-fi process to lower our payments. We;re transitioning from homeowners to investors and we need a lower mortgage payment to make it a viable proposition.
We refinanced to a 15 year mortgage a couple of years ago, so we have about 13 years left. We’ve been toying with the idea of refinancing again to a 10 year mortgage, but that would really stretch us. If rates go any lower, however, we may pull the trigger.
So a mortgage broker who showed people how to accelerate payments without refinancing, huh? Interesting!
You’re definitely proactive about managing your mortgage Julie.
You make a good point about a mortgage broker turning away easy business, and I can understand a little skepticism. I worked for a predominantly subprime broker so the rate conscious customers were not our target market. The higher risk mortgages offered much higher commission compared to refinancing Fannie & Freddie type deals.
I hope you don’t think I was being snarky! I was just curious how that worked exactly.
Not at all Julie. I always appreciate your feedback.
I just refinanced from a 30 year mortgage to a 15 year mortgage. At this moment I do not pay more toward the mortgage. We want to pad our savings in preparation for having a baby. After the child is born we will reconsider paying extra on the 15 year mortgage to get it to 10 years
Congratulations on the proactive financial planning. Everything changes when a new baby arrives, but you are preparing well. Thanks for sharing!
Excellent post Hunter! It is amazing how many are not aware of this simple truth. Just a little bit extra payment can shave off a few years from your loan.
In fact if you are thinking of refinancing, do consider if the closing cost you will have to pay would be better applied to your mortgage.
Monthly payment reduction vs. how soon you will own your home.
Great point MC. It’s so important to crunch the numbers before refinancing to compare savings from adjusting your amortization with the refi benefits and additional costs. If there’s little difference I would choose accelerated amortization and forego the headache of refinancing every time.
Good insight Hunter. I am planning to avoid mortgage altogether towards first home. Not sure when would I have one though. If I go for mortgage, I’d definitely pay off the principle as fast as I could.
Way to go SB. No mortgage at all! Since homes have become depreciating assets, that seems like a sensible way to proceed.
We haven’t done anything to accelerate payments with our current house but when we purchase our new house (hopefully within the next 6 months), we’re aiming for a 15 year mortgage. On top of that, we plan to make extra payments. If we time it right, we’ll be able to pay off the house just before our daughter starts college!
Great planning Jana. That will free up your resources to help with any tuition costs for your daughter.
Until last October, I made an extra $200 payment on the mortgage. Then we re-financed from a 30-year 5.875% to a 15-year 3.375%. The base payment went up by $160. Since we were paying $200 before, this actually gave us $40 in flexibility, and it shortened the term all while raising the amount paid in pricincple by over $300 per month. No way to beat that!
Great deal! You’re clearly a long way ahead by refinancing. Thanks for sharing MB.
When the final HARP terms comes down next month, I’m going to be refinancing. If I can move into a 15-year, I will, but if I have to do another 30, my plan is to keep paying my current payment toward the new terms. Either way, the principal pay-off will be accelerated, and I probably won’t notice any real difference in my bank account.
Thanks Eric. I think you’re making a wise decision by staying with an affordable payment for you, but clearly paying more than required, in the case of a 30 year mortgage refinance. You’ll be saving years, and interest over the long-term.
I’m going into the fourth year of a 5 year locked – 35 year amortized mortgage (yes, 35 years!) I’m not refinancing because it costs more than it would save and I’m not exactly interested in locking in since I’m not sure what I want to do with the house.
thankfully I have the option to prepay up to 20% of the mortgage every year and I’ve been making at least a $100 extra payment every month. makes a big difference in the end…. my mortgage payment is already so low that I can afford to throw a little more on it now that I’m debt-free-except-the-house, feels good to cut that amortization period down chunks at a time but I like to keep my regular payment low just in case
I like the flexibility of a lower mortgage payment too Andrea. The freedom to pay extra when it suits me always there, but when I need all my spare cash flow I can drop the payments back down. I wouldn’t refinance either if there was a possibility of selling the house. Love your house by the way!
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Thanks Jen!
Great post! I love the visuals that really hit home how much different extra principle payments affect the situation.
The charts really make it clear how much time and interest we can save. Thanks Hank.
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