Prepaying Your Mortgage (Part II)
In my article entitled "Prepaying Your Commercial Mortgage," I introduced the concept of using your amortization schedule to make prepayments. In this article, I'll show you how to do it.
Suppose when you make your first mortgage payment, you add an additional $250.12 to your payment. That’s the principal portion of payment number two. Let’s look at what you have accomplished by paying the additional $250.12.
First, your principal balance after just one month would be $249,501.00 instead of $249,751.12.
Second, you save $1,248.76 because you don’t have to pay interest on $249,751.12. Why? Because your principal balance went from $250,000.00 to $249,501.00.
Third, you just took one month off your mortgage because in one month, you made two payments of principal ($248.88 and $250.12). If you did this every month, your mortgage would be paid in full in 15 years!
If you pay the additional $250.12 when you send in your 1st payment, draw a line under payment number two (see figure 2) so you’ll know the breakdown for your next payment and so you can see what your balance is. Put a bracket around the numbers one and two, and write beside the bracket the month and year of your first monthly payment (for example, August 2008).
| Payment No. | Principal | Interest | Principal Balance | |
|---|---|---|---|---|
| August '08 | {1 | 248.88 | 1,250.00 | 249,751.12 |
| August '08 | {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 |
When you get to your second monthly payment, you will be at payment number 3. Add to your regular payment $252.63 (that’s the principal owed in payment number four). If you do that, your balance would be $248,997.00. And, you will have saved an additional $1,246.25 in interest. Draw a line under payment number four, put a bracket next to numbers 3 and 4, and write September 2008 next to the bracket. Consider this. By making a prepayment of principal in your first and second month, it costs you an additional $502.75 ($250.12 plus $252.63, but you save $2,495.01 in interest in just two months).
Over 5 years, the savings are dramatic. If you make no prepayments of principal, after the first 5 years you will be at payment number 60, and your principal balance will be $232,635.66. By making a prepayment using the method I’ve described, after 5 years you will be at payment number 120, and your principal balance will be $209,213.76. In just 5 years, you will have $23,421.90 more equity, and you will have saved $69,488.83 in interest.
If you do this every month, you will pay off your entire mortgage in only 15 years. Using the 6%, $250,000.00 mortgage example, you will save $144,484.94 in interest.
