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How to Pay Off Your Home Early Using an Amortization Schedule
A Sample Amortization Schedule
Your House Belongs to the Bank Until it is Paid For
Did you know that you don’t actually own your house until it is completely paid off? That means that if you lose your job or if something else happens that prevents you from making your payments that the bank can foreclose on your home and force you to move. Even if it is in the last year of your mortgage and you have paid thousands of dollars to them in the past. Miss a few payments and you can be evicted from your own home and your home sold to someone else. I know this because I’ve purchased foreclosure property and some of the stories can be tragic. It happens every day in the US.
Today I am going to show you a way to pay off your mortgage quicker to help you close that timeline of vulnerability. I’ve used this method before and it does work. It may sound a little overwhelming to you at first but once you get into the groove, you’ll love seeing just how quickly you can get to the end of the payments and how much interest you aren’t paying to the mortgage company. It’s money in your pocket when the loan is finally paid off.
Mortgage Loans are Different
Mortgage loans do not work the same way that other loans do like personal loans, credit cards or auto loans. They are structured differently. What you are looking at right now is an example of what you need to get from your mortgage company. Pick up the phone, call them and ask them for the amortization schedule for your loan. Every mortgage company that I have ever dealt with has provided this paperwork at no charge, but you have to ask for it to get it.
The example that you are looking at is for the first year of a $125,000, 30 year mortgage at a 4% fixed interest rate. Your mortgage is obviously going to be different but the numbers will be similar in their differences between the principal and interest gaps. The total principle and interest payment for this combination is $597.00 a month. Not a bad house payment and it is cheaper than what a lot of people are currently paying in rent.
The first column, the one that has the yellow header, is the amount of interest that your payment includes for each of the 360 planned payments that you would make if you followed the status quo “make the house payment every month” schedule that the mortgage company would like for you to make.
The second column, headed in green, is the principle. Principle is the amount that you are actually applying toward the house. In this example, the amount that is being applied to our original $125,000 loan balance is a measly $180.00. When you follow the status quo payment schedule and make your first house payment, you have just purchased approximately 3 sheets of drywall in your house, the other $417.00 is going directly into the lender’s pocket.
But, there’s a way that you can dig into your mortgage further and faster.
How to Use the Schedule for Your Benefit
Using our example, let’s pretend that we are making our first payment on this mortgage. We have to pay the $597.00 to cover the first month’s principle and interest, there’s no way to get around that. If we apply another $544.00 to that first house payment, it changes the mortgage ballgame.
By paying the extra $544.00 and telling the mortgage company that you are applying the extra money in your payment to the principle, you have just made FOUR house payments instead of one. You mark January, February and March off of your payment schedule. Your next payment’s principle and interest are based on April, 2016’s line in the amortization schedule.
You have just paid 4 house payments without having to actually pay 4 house payments. Or, you purchased all of the drywall that is hanging in your living room with your first house payment.
Your Next Payments and What Happens to the Interest?
Your next payment will be sent to the mortgage company on January 1st but you are now looking at April on your schedule. You are still paying the regular monthly payment of $597.00, but this month you have $551.00 more that you can apply toward your mortgage. You make out the check, include the note to the mortgage company that the $551.00 goes toward your principle and even though it is only your second mortgage payment, you are currently 9 months into your mortgage. Your next payment is due February 1st 2016, but according to your amortization schedule, you are making the payment for August, 2016. If you continue on this path you will have your first year under your belt with your 4th house payment.
What happened to the interest? You won’t have to pay that interest. You essentially just saved yourself $1,246.00 in interest with your very first payment. You won’t see that money today but for every month that you make the additional principle payments and knock those months off of your mortgage, instead of paying the mortgage company at the end, you are putting that money in your pocket.
Where's the Interest?
The Last Few Months of an Amortization Schedule
Are currently paying on a mortgage?
Start at the Beginning!
Now this is extremely important. This method works the best if you start at the beginning of your mortgage. As time goes on, the principle amount increases and the interest amount decreases until, as you can see with this example of the last few months of our example loan, they have completely flip flopped. Now the principle amount in each payment is much larger than the interest amount. You’ll see exactly what I’m talking about when you receive your amortization schedule that you ask for from your lender.
This is how banks make their money on mortgages. The majority of the interest is paid within the first half of the loan. This is also why people make very little profit on their house, sometimes even losing money if the property value fell, when they sell within the first 5 years of purchase. There is no equity, you don’t own enough “sheets of drywall” in that home if you follow the status quo payment schedule and decide to sell too quickly. The status quo banking system is designed to benefit the mortgage company, not you, the purchaser. In my opinion that is the main reason why mortgages are set up this way. Learn the system and it puts the control of your money back into your hands where it belongs to begin with.
Call your mortgage company now and request a copy of your amortization schedule. Look at your numbers with principle compared to interest. Your home is your biggest investment and it should belong to you, not the bank.