If you make extra payments that total 10 to 20% of your loan balance during the first few years of your mortgage, you can substantially lower the amount of interest paid during the loan period. For example, if you took a 30 year, $100,000 loan at an interest rate of 6.25%, you would pay a grand total of $121,000 in interest. If, however, you made an extra payment of $20,000 during the first year you would only pay $53,270 in interest payments. So, instead of spending $221,000 in total mortgage payments, you would only spend $153,270!
Find Out How Much You Could Save
Enter Loan Information Into An Amortization Calculator
First, use an amortization schedule calculator (available at http://www.amortization-calc.com/) to generate an amortization table. It would something like this:
Loan Summary - Total of Interest Payments and Total of All Payments
Based on this example, the total amount spent on a $100,000 home loan would $221,658. Interest on the debt would cost you $121,658
Amortization Schedule
Here is an amortization schedule for the loan amount in the example above. As you can see, at the start of the loan most of your annual payment goes toward interest. In year one, $6,216 goes towards interest and only $1,171 goes towards principle. At year 30, most of your annual payment goes towards principle and hardly any goes towards interest.
Scenario # 1: Paying Down $10,000 Starting at Time Zero
In this example, you would make a single extra payment of $10,000 immediately after getting your home loan. Doing this would knock your loan balance down to $90,000 and the interest/principle payment would start at year 8. What does this mean? Simply put, it means you would save a grand total of $41,753 in interest payments!
Scenario # 2: Paying Down $20,000 Starting at Time Zero
In this example, you would make an extra payment of $20,000 immediately after getting your home loan. Doing this would knock your loan balance down to $80,000 and the interest/principle payment would start at year 13. This means you would reduce your total interest payments by over $68,000. Instead of paying $121, 658 in interest you would only pay $53,270! Another benefit - the required time needed to pay off your loan would be reduced from 30 years to only 17!
Why Refinancing At a Lower Interest Rate May Not Be a Good Idea
Interest rates are great and it is very tempting to refinance, but make sure you run some calculations before you do so. When you refinance, you start the payment cycle over, which means you are also paying a higher interest/principle ratio. Using the example in Scenario #2, let's say you get a refinance offer with a 5% interest rate after the loan balance was reduced to $80,000. Doing this would start your payment cycle over at year one and would increase the 30 year interest total to $74,604. If you chose not to refinance in this type of circumstance, the remaining interest would only be $53,270.
Paying Your Loan Down by 10 to 20% Has The Greatest Long Term Payoff
While exact numbers depend upon your unique situation, you can probably save a lot of money. I encourage you to run the numbers. It may be worth scrimping for a year or two and saving a lot in the long run.
What If You've Already Been Making Payments for a Few Years?
If you've already been making payments for awhile, you can still save. Here is an example:
Find Out How Much You Could Save
Enter Loan Information Into An Amortization Calculator
First, use an amortization schedule calculator (available at http://www.amortization-calc.com/) to generate an amortization table. It would something like this:
Based on this example, the total amount spent on a $100,000 home loan would $221,658. Interest on the debt would cost you $121,658
Amortization Schedule
Here is an amortization schedule for the loan amount in the example above. As you can see, at the start of the loan most of your annual payment goes toward interest. In year one, $6,216 goes towards interest and only $1,171 goes towards principle. At year 30, most of your annual payment goes towards principle and hardly any goes towards interest.
Scenario # 1: Paying Down $10,000 Starting at Time Zero
In this example, you would make a single extra payment of $10,000 immediately after getting your home loan. Doing this would knock your loan balance down to $90,000 and the interest/principle payment would start at year 8. What does this mean? Simply put, it means you would save a grand total of $41,753 in interest payments!
In this example, you would make an extra payment of $20,000 immediately after getting your home loan. Doing this would knock your loan balance down to $80,000 and the interest/principle payment would start at year 13. This means you would reduce your total interest payments by over $68,000. Instead of paying $121, 658 in interest you would only pay $53,270! Another benefit - the required time needed to pay off your loan would be reduced from 30 years to only 17!
Interest rates are great and it is very tempting to refinance, but make sure you run some calculations before you do so. When you refinance, you start the payment cycle over, which means you are also paying a higher interest/principle ratio. Using the example in Scenario #2, let's say you get a refinance offer with a 5% interest rate after the loan balance was reduced to $80,000. Doing this would start your payment cycle over at year one and would increase the 30 year interest total to $74,604. If you chose not to refinance in this type of circumstance, the remaining interest would only be $53,270.
Paying Your Loan Down by 10 to 20% Has The Greatest Long Term Payoff
While exact numbers depend upon your unique situation, you can probably save a lot of money. I encourage you to run the numbers. It may be worth scrimping for a year or two and saving a lot in the long run.
What If You've Already Been Making Payments for a Few Years?
If you've already been making payments for awhile, you can still save. Here is an example:
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