Prepaying Your Commercial Mortgage
How would you like to save $69,500.00 in just 5 years? I’m going to show you how to do it. Of course, the amount you save will depend on the size of your mortgage and your interest rate, but let’s assume by way of example that you take out a 30 year mortgage for $250,000.00 at 6% interest. The killer is the amount of interest you have to pay. Over the 30 years, your payments of principal and interest will total $539,595.47, of which $289,595.47 is interest.
That’s almost $40,000.00 more than you originally borrowed!
Many of us have heard that you can save a great deal of money if you pay more than your regular monthly payment. It’s true. You can save thousands of dollars in interest, and pay off your mortgage in just 15 years. Even if you don’t stay in the same property for 15 years, making prepayments of principal guarantees you will build equity a lot faster, and when you do sell the property, you will walk away from the settlement table with more cash in your pocket.
There are different ways to make prepayments of principal, but in my opinion, the best way is to use an amortization schedule and follow the method which I describe below. Let’s stay with the example of $250,000.00 and an interest rate of 6%. Each month, your payment of principal and interest is $1,498.88. This payment stays the same for the full 30 years. What changes every month is how much of your payment goes to principal, and how much goes to interest. In the earlier years, most of the money you pay is interest.
In Figure 1, you can see the amortization schedule for the 1st 12 months.
| Payment No. | Principal | Interest | Principal Balance |
|---|---|---|---|
| 1 | 248.88 | 1,250.00 | 249,751.12 |
| 2 | 250.12 | 1,248.76 | 249,501.00 |
| 3 | 251.37 | 1,247.51 | 249,249.63 |
| 4 | 252.63 | 1,246.25 | 248,997.00 |
| 5 | 253.89 | 1,244.99 | 248,743.11 |
| 6 | 255.16 | 1,243.72 | 248,487.95 |
| 7 | 256.44 | 1,242.44 | 248,231.51 |
| 8 | 257.72 | 1,241.16 | 247,973.79 |
| 9 | 259.01 | 1,239.87 | 247,714.78 |
| 10 | 260.31 | 1,238.57 | 247,454.47 |
| 11 | 261.61 | 1,237.27 | 247,192.86 |
| 12 | 262.92 | 1,235.96 | 246,929.94 |
In the first month, $248.88 of your payment is applied to principal, and $1,250.00 is applied to interest. When you subtract $248.88 from the original loan of $250,000.00, the principal balance after the first payment is $249,751.12.
In order to use the complete 30 year amortization schedule, insert the following information:
Principal: 250000.00
Number of Regular Payments: 360
Payments Per Year: 12
Annual Interest Rate: 6.0
Then place a check in the box called “Show Amortization Schedule,” and click on the "Calculate” button. The amortization schedule shows on a monthly basis how much of your payment is applied to principal and interest, and what your mortgage balance is after each payment.
