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Additional Principal Payments Can Reduce your Loan Period
Do you make extra principal payments on your mortgage each month? Have you wondered what the effect is on your mortgage? Depending on how much you pay, it can significantly reduce the total period of your loan.
Using the following loan as an example:
Loan amount: $100,000
Interest rate: 6.5%
Term: 30 years
Payments per year: 12
The monthly payment would be $632.07 (excluding escrow and other charges).
If the homeowner added $100 to the payment each month for just the first year, the period of the loan would be reduced to 29 years.
An additional $1,200 up front would save you over $7,500 at the end.
If the homeowner paid an extra $100 every month, the loan would be reduced by over 9 years! Extra payments of about $25,000 result in a total payment reduction of almost $70,000.
Although you may not be able to pay extra every month, even a few extra payments would shorten the loan over the long term. (Of course, you could also put that extra money in a high return investment and maybe come out better. But that's another story.)
An amortization table for the sample loan would show other interesting things. For example, $541.67 of the first payment goes to interest and only $90.40 goes to principal. It actually would take over 21 years to reduce the principal below $50,000, or half the value of the loan. Total interest payments over the 30 years of the loan would be $127,544. So you borrow $100,000 and wind up paying back $227,544. Is that scary or what? |
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Calculate Your Own Loan Amortization Table
Use one of the links below to download a copy of a spreadsheet you can use to produce an amortization table for your mortgage, auto loan, or other
loan. Fill in your loan data and see how much of your payment goes to interest and principal each month. It can also show what the effect of additional payments would be on the term of the loan.
In the
spreadsheet, change the items in red for your loan & your
monthly payment should calculate. (Not including escrow, etc.)
Drag across line 17 (payment 2) then down to line 375 (or
whatever number is in blue). Then select edit/fill/down from the
menu. You should see the interest and principal amounts for each
month.
DOWNLOAD
Amortization
Table in Excel
DOWNLOAD
Amortization
Table in Microsoft Works
(Internet
Explorer: Right click and select "Save Target As"
from the menu
Netscape: Right click and select "Save Link As"
from the menu) |
