Ever wonder how your mortgage goes from a pain in your neck to free and clear?

Well, it all has to do with a little thing called “amortization,” which is defined as the reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity.

In simple terms, it’s the way your mortgage payments are distributed on a monthly basis, detailing how much interest and principal will be paid off each month for the duration of the loan term.

Understanding the way your mortgage amortizes is a great way to understand how different loan programs work. And an amortization calculator will show you how your balance is paid off on a monthly or yearly basis. It will also detail how much interest you’ll pay over the life of your loan, assuming you hold it to maturity.

### Early Payments Go Toward Interest

(pictured above is an actual “amortization schedule” from an active mortgage about five months into a 30-year mortgage)

During the first half of a 30-year fixed-rate loan, most of the monthly payment goes to paying down interest, with very little principal actually paid off. Towards the last 15 years of the loan you will begin to pay off a greater amount of principal, until the monthly payment is largely principal, and very little interest.

This is important to note because homeowners that continuously refinance will find themselves back in the interest-paying portion of the loan every time they start anew, meaning they’ll pay a lot more interest over the years. Each time you refinance, assuming you refinance into the same type of loan, you’re essentially extending the amortization period of the mortgage. And the longer the term, the more you’ll pay in interest.

Tip: If you have already paid down your mortgage for several years, but want to refinance to take advantage of low mortgage rates, consider refinancing to a shorter-term mortgage. This is one simple way to avoid “resetting the clock.”

### Let’s look at a mortgage amortization example:

Loan amount: $100,000

Interest rate: 6.5%

Monthly mortgage payment: $632.07

Say you’ve got a $100,000 loan at 6.5% on a 30-year fixed payment. The monthly principal and interest payment is $632.07. If you break down the very first monthly mortgage payment, $541.67 goes toward interest and $90.40 goes toward principal. The total debt is reduced by $90.40, so next month you’ll only owe interest on $99,909.60.

So when it comes time to make your second monthly mortgage payment, interest is calculated on the new, lower balance. The payment would be the same, but $541.18 would go toward interest and $90.89 would go to principal. This interest reduction would continue until your monthly mortgage payments were going primarily to principal.

In fact, the 360th payment in our example contributes just $3.41 to interest and a whopping $628.66 to principal.

### Consider Larger Mortgage Payments to Shorten Amortization Period

Okay, so now you have a better idea of how your mortgage amortizes. Your next move will be to determine if paying your mortgage down faster is a good idea.

In the example above, you’ll pay a total of $227,545.20 over the 30-year term, with $127,545.20 going toward interest.

If you make slightly larger payments, say $700 each month instead (consistently), your mortgage term will be cut by roughly seven years and you’ll only pay $76,448.10 in interest. That will save you about $50,000 over the life of the loan…not bad.

Take the time to look into biweekly mortgage payments as well. These are mortgage payments made every two weeks, which equates to 26 total payments a year, or 13 monthly mortgage payments. That extra month payment per year goes toward principal, lowering the total amount of interest paid and decreasing the term of the loan.

Every potential homeowner should take a look at an amortization schedule or a mortgage calculator to determine exactly how mortgage payments apply in their particular situation. Simply knowing your interest rate is not enough to make an educated decision on a loan product.

And be sure you understand negative amortization as well, assuming if you got involved with a pesky option-arm loan.

Read more: 30-year vs. 15-year mortgages.

RosalieJuly 15, 2013 at 11:13 am -I don’t think people understand how important the amortization period is. They only seem to focus on monthly payments. But the interest savings on a 15-year mortgage are huge, assuming you can handle the extra cost each month.

Colin RobertsonJuly 15, 2013 at 1:02 pm -That’s true; most lenders just advertise the monthly payment amount, seeing that it’s what most borrowers focus on. And it’s true that a shorter-term loan will result in a lot less interest paid, but also consider most homeowners move in less than 10 years. And some invest their money elsewhere for larger returns. So the proposed amortization period doesn’t always come into play as scheduled.

EllaJuly 16, 2013 at 9:38 pm -This is exactly why you should go with a 15-year fixed. You will pay A LOT less in interest over half the amount of time. Use an amortization schedule and you’ll see the many tens of thousands you will save.

PatriciaJuly 18, 2013 at 9:31 am -Most homeowners don’t know (or seem to care about) how a mortgage is actually paid off. They just look at the monthly payment and nothing else, thanks to the banks. It’s a shame because it could mean the difference of thousands of dollars.

ThomasAugust 20, 2013 at 8:53 am -This is what they mean by resetting the clock if you refinance before your mortgage term is over. You essentially restart the amortization period, and again start paying nearly all interest in your early payments. So those that refinance should always consider shorter terms to avoid extra interest costs.

Jack R.December 12, 2013 at 6:19 am -I know exactly how my mortgage is paid off, which is why I went with a 10-year fixed. I’ll save more than $100,000 in interest compared to a 30-year fixed and own my home 20 years sooner. Policymakers in Washington should abolish the 30-year fixed now! It’s a ripoff!

Colin RobertsonDecember 12, 2013 at 7:06 am -Yep…I wrote about that specific topic as well here:

http://www.thetruthaboutmortgage.com/resetting-the-clock-when-refinancing-your-mortgage/

Quentin K.January 18, 2014 at 11:38 pm -If I make an extra mortgage payment, will that be reflected in the monthly payment of the amortization schedule? Or does it just reduce interest over the life of the loan?

Colin RobertsonJanuary 20, 2014 at 11:12 am -If you were to make an extra payment, subsequent monthly payments would still be the same amount, but the interest portion of the payment would go down and the principal portion would go up. As a result, the term of your mortgage would be reduced.

Margie B.July 31, 2014 at 5:31 pm -My husband would like to retire in 4 years when he’s 55, just in case his company lays him off, as it is happening to others there when they reach that age. We are 3 years into a 15 year loan at 3.125%. I’ve been putting extra (same amount as our mortgage amount) towards the principal each month.

Question: Would it be more beneficial to put that amount each month towards the principal,or as an extra mortgage payment? Using amortization tables online, I’m seeing that we can pay off our home in 4 years by putting the extra towards the principal.

What are your thoughts?

Sincerely,

Margie Bayer

Auburn, WA

Colin RobertsonAugust 1, 2014 at 9:51 am -Margie,

It sounds like you’re talking about two things that are essentially the same. Generally, any excess amount over your mortgage payment due each month goes toward the principal balance. Sometimes you have to indicate that the extra amount should go toward principal as opposed to say escrow. Either way, the quicker you apply extra (or larger) payments, the more beneficial it is. In other words, if you started making double payments the first month your mortgage was due, you’d save more (on interest) than if you didn’t start making double payments until say month 13 because each month a smaller balance would equate to less interest due the following month.

SteveAugust 2, 2014 at 6:33 pm -Exactly, we are just now finding out that 16 years in, even when we double payments we missed the bigger boat during the first 15 years. We are aiming to get it fully paid in the next 3 years, but we already paid the majority of interest so the only good thing is time. Our next mortgage will be paid majority first 15 years instead to kill that extra interest.

Nice blog appreciate it.

LindaSeptember 12, 2014 at 3:14 pm -We have heard that if we make an extra mortagage payment on the principle the first year of the loan and then two extra payments the second year, we would cut our mortgage from 30 to 15 years. Is that correct?

Colin RobertsonSeptember 12, 2014 at 6:45 pm -Hmm…even if you made one extra payment annually each and every year it would only reduce a 30-year term by a little over four years. Two extra payments annually would shorten the term a bit more, but not cut it in half. Furthermore, the earlier you make extra payments, the more you save. So waiting to make extra payments doesn’t really make sense. Let me know if you have more details on this payment structure.

MarkSeptember 19, 2014 at 11:02 pm -If you pay off a 30 year mortgage in five years, is the cost the same as paying off a 5 year mortgage in five years? Assume the same interest rate for both mortgages and assume extra monthly payments on the 30 year mortgage to match the payments on the 5 year mortgage. If the cost is the same, what’s the benefit of getting a five year mortgage vs. a 30 year mortgage paid off in five years?

Colin RobertsonSeptember 20, 2014 at 9:28 am -Mark,

It shouldn’t cost the same…the interest rate on a 5/1 ARM should be around 1% lower than a 30-year fixed, so if you really planned to pay it off in five years, you could go with the ARM and save money on interest. But you’d have to make extra payments to principal each month because the ARM still amortizes over 30 years. So it requires a bit more work to pay it off on schedule.

Mike DillonSeptember 27, 2014 at 8:30 am -Colin, my wife and I are gathering info to send to lender for refi of our 30yr into a 15 yr – we are exactly 1yr into the 30 yr. I’d like to find an amortization schedule that will let me enter a fixed monthly additional princ payment starting now (2nd yr in) so I can compare to the refi. I want to do this to determine if I should do refi or just increase monthly payment on my own. The calculator on bankrate won’t let me “jump in” other than at the beginning. We currently have 4.25% and would be getting 3.3% on 15yr.

Thanks,

Mike

Colin RobertsonSeptember 27, 2014 at 12:55 pm -Mike,

Just do a search for an early mortgage payoff calculator and you’ll be able to find one that lets you add a set amount each month to see the amortization schedule. You’ll likely find that you’ll need to pay quite a bit more each month to match the 15-year with a 1% lower rate.

KellyOctober 14, 2014 at 10:22 am -We are getting a $206,000, 15 year loan, with 10% down. We have not sold our current home yet, so when we do we will have approx. $30,000…Do we refinance or pay the lump on the current mortgage, which will benefit us the most?

Colin RobertsonOctober 14, 2014 at 12:16 pm -Kelly,

If you’re only putting 10% down, I’m assuming you have to pay mortgage insurance (or take a slightly higher rate). You’ll have to do the math but a refi could mean you can wipe out the mortgage insurance if you apply the $30k to the balance and pay it down below 80% LTV.

However, if you keep the original loan and apply $30k to the balance, less interest would be paid and the loan would be paid off in less than 15 years. Alternatively, if you refinance with a smaller balance it would take the full 15 years to pay off the loan and result in more interest, but your monthly payment would be smaller because the loan size would be closer to $176k.

LarryOctober 15, 2014 at 8:25 am -Great suggestions! I’ve been paying an extra $250/month on my 30 year mortgage. I’ll check out the “early mortgage payoff calculator. Thanks.

JoeDecember 1, 2014 at 9:48 pm -What’s the difference between having a 30yr mortgage and paying it off early in only 20 yrs versus having a 20 yr mortgage and paying it off at the end, aka 20 yrs?

cause if you end up spending the same amount of money, then I rather go with a 30yr mortgage and pay extra each month, BUT if $hit hits the fan and i need that extra money for a few month, I can revert back to paying the minimum due which would be much lower on a 30 yr vs. 20 yr plan.

Am I missing something?

Colin RobertsonDecember 2, 2014 at 9:53 am -Joe,

The interest rate could be slightly lower on the 20-year fixed, which would make it cheaper unless you make even larger extra payments on the 30-year fixed. Additionally, it requires no work on your behalf to make the larger payments tied to the 20-year fixed. On the other hand, you need to be disciplined to make extra payments on a 30-year fixed. Many people lack discipline…but yes, it gives you an out during tough times.

IanDecember 26, 2014 at 5:55 pm -I have a fixed rate mortgage. I have not missed payments or been late. The bank statement says I paid more interest this year than last year. How is this possible?

AsimDecember 29, 2014 at 11:58 am -Question: I have 30 year amortization left on my mortgage – I am paying double my mortgage each month(weekly payments) – so my amortization showing 10 years left , that it will be paid off in 10 years if i keep paying double mortgage.

My Question is, i am due for renewal in 2016, Should i decrease the amortization to lets say 10 years – so then what i am paying now becomes my normal payment. Which pay i will be paying more towards principle, and less interest? ? or it doesn’t matter, if i pay double, with 30 year amortization, or normal with 10 year amortization,

(reason i am thinking decreasing amortization is because it would give me option to pay it even sooner, as currently i am paying the maximum allowed).

Any input is appreciated.

AsimDecember 29, 2014 at 12:11 pm -To be Exact, $140,000 mortgage, $160 weekly payment , but i pay $360 weekly – which include taxes (yearly$2000) –

by doing this my bank showing that i will pay off mortgage in 10 years, 14 weeks, (original amortization showing 35 years).

so when i renew it in jan 2016 – should i decrease the amotriazaion period to lets say 15 years, ,, or what i am doing now is better, as what i am paying extra should be going towards principle. ?

Colin RobertsonDecember 29, 2014 at 12:30 pm -Asim,

If you are truly capped on what you can pay and want to pay more, refinancing to a 10-year loan might make sense. But you’ll have to deal with closing costs. Though you might be able to get a lower interest rate on a 10-year loan to offset those costs and then some. Also keep in mind that a 10-year loan means you MUST make larger payments…it’s no longer optional as it is now with your 30-year loan. Do the math and consider your goals and what you’re comfortable with to make a decision.

Colin RobertsonDecember 29, 2014 at 8:34 pm -Ian,

It might be that you made an extra monthly payment this year as opposed to last. Check out this post:

http://www.thetruthaboutmortgage.com/boost-your-tax-deduction-by-making-your-january-mortgage-payment-this-year/

ElaineJanuary 14, 2015 at 8:10 am -Question for Colin:

I’m in the process of payment of student debt. If I make a significant initial payment (70K of a 100K loan) will it reduce my subsequent monthly payment minimums? Or does it depend on the repayment plan? I’m presently doing an “Income-Driven Plan,” but my goal is to have the loan paid off ASAP without being completely broke in the interim.

Thanks so much.

Elaine

Colin RobertsonJanuary 14, 2015 at 10:17 am -Hey Elaine,

I’m not sure if student debt reamortizes. Mortgages don’t, so if you paid down a mortgage similarly, you’d still owe the same monthly payment as the month before, but you’d pay off your mortgage much faster. You’ll need to contact your servicer to see how they handle it. Ask about recasting.

TiffyJanuary 24, 2015 at 5:03 pm -Hi Colin,

I’m debating on whether or not I should refinance my mortgage loan to a 15 year loan from a 30 year or keep adding balloon payments. This would be my 2nd refinancing as I refinanced 2 1/2 years ago to another 30 year (not wise on my part so I’ve learned). First mortgage was in 2007 for $200,000 30 yr/6.125%, kept it for 5 years then refinanced in June 2012 at $170,000 for another 30 yr/ 3.875% (had to throw extra money to avoid PMI). Have been adding extra payments for the past 2 1/2 years and am now down to $138,800. I don’t know if I should continue to paying extra toward principal or refinance a smaller balance, am thinking of $125,000 for 15 yr/2.875%. Since my first loan, I’ve already paid $77K in INT. I did not realize that it was better to pay extra much earlier in the loan than later. Any advise would be greatly appreciated. Thank you!

Colin RobertsonJanuary 26, 2015 at 11:00 am -Hey Tiffy,

If your goal is to pay down the mortgage as quickly as possible and you have the money and don’t plan to invest it elsewhere for a better return, a 15-year mortgage could make sense. The obvious advantage is a lower mortgage rate, the downside is you must make the larger payments each month, it’s no longer optional as it is with the extra payments you’ve been making. Also consider the cost of any refinance in your calculations.

CherylJanuary 28, 2015 at 6:21 am -Hi Colin,

I’m 12 yrs into a 30yr loan at 5.75%. Due to where I am on the amortization schedule, it seems not to make sense to refi – even in to a 15yr at around 4% (this in an investment property). Are years in to the amortization a consideration for a refi?

Colin RobertsonJanuary 28, 2015 at 10:38 am -Cheryl,

Yes, years remaining on the loan matters for sure, but if you can drop your rate nearly 2% and go with a relatively similar term, the savings should be pretty substantial. And you could look into a 10-year fixed to save even more, assuming you want to pay faster and can handle the payments. Or you could pay extra on a 15-year fixed to amortize it faster. Do the math with an amortization calculator and you’ll be able to see what I’m talking about.

AmyFebruary 8, 2015 at 8:26 am -I was told that if I print out my amoritization schedule and pay the next month’s principal amount, it will shorten the mortagage length by a month. So using your example above, if I pay 532.30 more than my payment in Feb 2013, would that essentially mean I have 358 more payments to make?

Colin RobertsonFebruary 9, 2015 at 10:59 am -Amy,

It’ll probably be close to shaving a month off your payment schedule. More importantly the interest savings over the term of the loan will exceed that extra principal payment. So $500 paid early on may save $1500 depending on loan balance and interest rate.

Anne ChidaFebruary 27, 2015 at 10:25 pm -Someone told me there is a way you can pay only towards principal on your mortgage throughout the year and then pay the interest at the end of the year. The benefit, they said, is that the interest would be calculated on the lower principal at year end. Obviously we would need to have funds available to pay a large interest sum at end of year but have you ever heard of doing this, and if so, is it a good idea?

Colin RobertsonMarch 2, 2015 at 10:58 am -Anne,

Not sure about that one. Generally as you pay down more principal early on the interest due decreases because it’s calculated on a smaller balance.

MillieMarch 6, 2015 at 12:04 pm -Question to Colin:

I have a 20 year mortgage. Loan is 261800. The maturity will be 10/21/2024. Why do I still show $164,393 Would I pay my loan at maturity date? I pay the first instead of the 21 and never missed a payment.

Colin RobertsonMarch 6, 2015 at 6:31 pm -Millie,

It’s because you pay the majority of interest during the first half of the mortgage (larger outstanding balance = more interest), and mainly principal towards the end (because the outstanding balance is small).

JoeApril 22, 2015 at 2:02 pm -Assuming the same APR and same total loan amount for a 15-year payback period, is there any advantage to a fixed rate INSTALLMENT LOAN versus a 15-year mortgage?

Colin RobertsonApril 22, 2015 at 2:09 pm -Joe,

Probably that mortgage interest is deductible, and the installment loan might not be.

Kathy SpearsMay 9, 2015 at 7:01 am -I only owe 4100 on my mortgage. Should I now put extra money on the principal or pay an additional amount toward the balance of the loan to get this paid off within the year. Thanks.

Colin RobertsonMay 11, 2015 at 10:06 am -Kathy,

That’s your decision but if you only owe a small amount you’re probably not paying much interest anyway because toward the end of the loan term payments are mostly principal.

MikeMay 19, 2015 at 4:49 pm -Hi Colin,

I have been reading extensively about mortgages and am going to close soon on my very first one. Although I would love to get a 15 yr I think it may be wiser to have the flexibility of a lower payment with the 30 yr fixed. I am very good at saving money and would like to try my best to pay off the 30 yr in 15 yrs. To achieve this, can I simply print out an amortization schedule for a 15 yr mortgage using the exact same interest rate I have on my 30 yr (3.875%) and make sure that I pay the principal due on the 15 yr schedule each month (minus the amount of principal already built in to my 30 yr one)?

Alternatively, I also wondered what the effect would be if I used the amortization schedule of a 30 yr fixed and then made an additional payment each month of the interest due that month in addition to the principal (in other words, paid the interest due that month twice–once for interest and then the second time put that amount due for interest toward the principal. My reasoning behind this strategy is that I would be paying more toward the front end of the mortgage and then my extra payments each month would decrease as the interest paid each month decreases, thereby keeping the extra payments a little more affordable. I just don’t know how much I will save overall if I do things this way as opposed to simply paying according to the 15 yr schedule.

I would appreciate any input you have, or any further strategies on how best to convert a 30 yr mortgage into 15 yr without being bound to a true 15 yr.

Thanks so much!!

Colin RobertsonMay 19, 2015 at 8:24 pm -Mike,

More or less, yes. You could just make the 15-year payment without worrying about the schedule. However, keep in mind that you are comparing apples and oranges. The interest rate on the 15-year mortgage would be lower so technically you’d have to make an even larger extra payment to equal the savings of the 15-year. But that’s being super technical.

MonaMay 31, 2015 at 4:31 pm -I am in the process of buying a house for 206,000. I am putting 20% down. What will happen if I pay my monthly payments plus the interest amount from the 360th payment then pay the second payment including the 359th interest amount, etc. What would this accomplish as opposed to every two weeks 1/2 payments?

Colin RobertsonJune 1, 2015 at 10:23 am -Mona,

The interest amount on the 360th payment would only be a few dollars (it goes down each month over time) so it wouldn’t speed up the payoff of your mortgage very much.

LauraJune 9, 2015 at 8:23 pm -I am 68 years old and have a 15-yr mortgage with a 4 percent interest rate and in my 4th year on the loan and am wanting to pay the loan off in 5 years. Currently the balance is $57,667 P&I is $608.87. How do I proceed to do this?

Thanks

Colin RobertsonJune 10, 2015 at 1:58 pm -Laura,

Do you mean five years total, or five years from now? Either way, you’ll need to find an early payoff calculator to determine what extra amount must be paid monthly to accomplish your goal.

KimJune 22, 2015 at 12:10 am -I will buy the house for $185,000. I want to pay mortgage term 15 years. How can I apply for 15 years term and what I need to do. Thank

Colin RobertsonJune 22, 2015 at 9:19 am -Kim,

Just about any lender will offer mortgages in both 30-year and 15-year terms. So if you want a 15-year loan simply let them know when you apply.

CindyJuly 13, 2015 at 9:26 am -Hi, Colin,

My boss told me there is a better way to pay off early than making extra payment a year or adding $100 or $200 to the monthly payment.

He said that he paid off his house (decades ago) in under 10 years by paying off a specific amount from an Amortization table. He can’t remember exactly how he did it, but he paid the exact amount of the next payment (principal) a few months out. Can you differentiate between that and making payments where you add $100 or $200 a month? Seems to be about the same thing as far as I can tell (paying down principal =s less interest and fewer payments in the long run). He seemed to think there was extra benefit involved in paying the exact amounts early from the amortization table.

Colin RobertsonJuly 15, 2015 at 11:39 am -Cindy,

You can pay as much (or as little) extra as you’d like, depending on what you want to accomplish. If you want to pay your 30-year loan off in 15 years, you’d just make whatever the 15-year payment would be. If you want it paid in 10 years, you’d make whatever the 10-year payment would be. This assumes you’ve been making that larger payment since month one. If you just want to save some money, you could pay an extra $100 or $200 or whatever else you choose. To determine the payment size, just change the loan term to see what those larger payments are.

MikeAugust 2, 2015 at 11:37 am -My wife and I find ourselves in an enviable position! We have lived in our current home that had a $400,000 30yr. fixed rate mortgage at 3.625% for 3 years. we are now able to afford paying an additional $3,000 per month towards the principal.

I have been looking online at various amortization calculators and find that our loan will be paid off in 7 1/2 years. My question involves the amortization calculator as it has a box to click if the loan is amortized monthly or yearly. clicking either of these choices does not seem to make a difference as to when the loan will be paid off.

What’s the difference and why does it ask for this information?

Colin RobertsonAugust 2, 2015 at 12:20 pm -Mike,

Is it showing monthly OR annual totals for interest and principal? That might be it?

LaurieAugust 9, 2015 at 10:08 pm -We are looking at buying a new house which means a bigger mortgage. Our mortgage broker is trying to get us to do a 30 year mortgage and up the monthly payments to the same amount as we would pay on a 20 year. That way if we ever need to lower the payment we can. My question is will I be paying more interest by going with a 30 year over a 20 year but making the 20 year payments each month right from the beginning. I understand what she is saying by allowing myself the freedom to lower if necessary but not if it’s going to end up costing me thousands of dollars more in the long run.

JCAugust 10, 2015 at 10:31 am -Is it possible to get a full amortization schedule from current lender, even if lender has changed 4-5 times in 15 years (not my choice)? I want to make sure all payments are correct before payoff at house closing. Citi balked and said they could only go back so far, seems to me this should be required paperwork at payoff.

cheryl vickSeptember 21, 2015 at 8:23 am -Reading on how your interest rate goes up in your payment when you refinance. We’ve never refinanced however our mortgage has been sold off 4 times in 4 yrs and the monthly toward interest goes up. If they keep doing this I am paying less towards principal. Is this legal and what can I do? Please help

Colin RobertsonSeptember 22, 2015 at 11:57 am -Cheryl,

Best to determine why the interest portion is going up each month. Could be an adjustable-rate mortgage. Once you know why you can take action to fix the problem, perhaps with a fixed-rate mortgage.

Kamille KOctober 5, 2015 at 1:52 pm -I am now 7.5 years into a 15 year loan (@ 5% interest). If I started making an extra payment a year, but telling them to put this extra payment towards my principle, would this cut down any of the 7.5 years I have left to pay this loan.

The amount is about 125.00 plus the actual principle and interest. Granted, the principle being paid each month is more than double what the interest is, so is it even worth doing this, and would I cut any years(s) off my original loan?

Colin RobertsonOctober 7, 2015 at 11:20 am -Kamille,

As they say, every little bit helps. Paying extra early will reduce what you owe in interest, but I can’t say with certainty how much time it will shave off your loan. You’ll need to input the figures into an early payoff calculator to determine exactly how much money/time it will save you.

ColeOctober 8, 2015 at 4:10 am -I am currently at a 3.25% fixed VA 30 yr mortgage which I have been paying on for a year. I completely understand the amortization scale. A bank will make about 70% of the loan profit (interest) within the first 9 years of the loan. Currently, I have a broker trying to talk me into a 2.75% 5yr VA arm which doesn’t make sense to me on its face but he stated that the amortization scale is different in that within the same 9 yr period, the bank is only getting about 50% of the interest so that means more money goes to principle opposed to the fixed rate mortgage.

I am having a hard time trying to find out if this is correct or if I am being sold snake oil.

Colin RobertsonOctober 15, 2015 at 9:06 am -Cole,

A lower interest rate means less interest and more principal in each payment. It also means the total payment will be lower. But the difference in principal after say five years probably won’t be sizable between the two rates you mentioned so you have to look at costs to refi and risk of the ARM resetting higher.

Jennifer LOctober 20, 2015 at 10:06 am -We have a mortgage and after requesting a statement that shows payments made and the amount that went toward principal vs. interest. There are multiple payments where all of the payment went to principal and nothing went towards interest. The amounts that are applied on others vary greatly as well. I did an amortization table based on the first payment due and the current month/year we are in and it has around a $3000 different amount between what should have been applied toward principal and what really was. How can I figure out if the payments were applied wrong?

Colin RobertsonOctober 20, 2015 at 3:18 pm -Jennifer,

Probably best to call your loan servicer to get all the payment history and ask where each payment was applied and why. I’m assuming any overage just went toward principal since you can’t pay extra interest.

PatOctober 21, 2015 at 2:51 pm -Colin,

I have several mortgages, one on my primary house and others on rentals. All of my statements seem to be computed in the same with the exception of a small mortgage I have on a house I own with my IRA. When I make an extra payment on my IRA mortgage, the additional principal goes to the next payment period, while on my other loans it goes to the current pay period. I assume that since the payment is not in by the “payment due date” i.e. the 1st of the month, that the additional principal does not count until the following pay period, but then why is this not the case on all my mortgages. Are “commercial” loans under different federal guidelines than personal mortgages? I know that my IRA mortgage had to be a non-recourse loan, while all my other mortgages are traditional loans.

Thanks,

Pat

Colin RobertsonOctober 21, 2015 at 3:21 pm -Pat,

Best to call your servicer and ask how/why payments are being applied like that.

LyndaOctober 26, 2015 at 2:02 pm -I’m 10 yrs into a 30 yrs fixed mortgage at 5.75% with impounds fees included in the mortgage payment of $924.00. I have come to my senses to try and pay down my mortgage at the age of 66 yrs. I still have $108,000 left to pay. I have investigated on getting a refi – for a lower rate but if I pay a monthly amount toward the Principal that technically is lowering my APR I have read.

My question is this– how many years will a $200.00/month to the Principal decrease my 20 years mortgage?

Thank you,

Lynda

Colin RobertsonOctober 26, 2015 at 3:52 pm -Lynda,

Yes, you can reduce your interest expense (and thus lower the APR) by paying extra early. To figure out what $200 extra would do per month you can plug in the numbers into an early payoff calculator. It will tell you how much you’ll save and how quickly the loan will be paid in full. Make sure you specify when those extra payments are actually starting to get accurate figures.

RamNovember 11, 2015 at 4:47 am -Colin,

I am planning to buy a home and say it is worth $35000. If I chose 5 year arm, the monthly mortgage is almost $1500. If I chose 20 year FHA, the monthly mortgage is almost $2000.

If I chose 5 year arm and pay an extra $500 towards principal, does that going to be better than 20 year FHA? At the end of 5 year arm, if I refinance to 15 year fixed.. is that going to make it better?

Thanks,

RAM

Colin RobertsonNovember 19, 2015 at 10:20 am -RAM,

You need to do the math with an early payoff calculator to see the difference in loan balance after say five years and also lifetime. Going with the ARM and the extra $500 a month might leave you with a slightly lower balance than the 20-year term with no extra payment. But also consider that with the ARM, you’ll need to refinance if rates rise in five years and rates may not be as low in the future.

T ShaneNovember 20, 2015 at 5:51 pm -I have 10 years left on my 15 yr mortgage. I can save about 2% by refinancing to a 10/30 yr ARM. How can I calculate the monthly payment easily to have the ARM paid in full at the end of the 10 yr period so the adjustable rate never is relevant. 115K on 10 yr ARM at 2.9% vs. my current 4.8%… this appears to provide for a better rate than a 10 yr fixed.

P.M.November 25, 2015 at 11:35 pm -Stop trying to get financially fit messing with interest rates or term years. If you are thinking in 15-30 year terms you are financially screwed. Quite literally.

Just take a 30 year and pay it like a 15 year at the minimum. The goal is not to play with 1 or 2 %… the goal is to be filthy rich! Total “cost weight”, is the thing to look at(my own term which means, how much an investment costs you verses how much you can gain off it.)

I bought a super steal of a house 3 years ago put it on a 30year because of the rate, but have paid it down to 1/4 of current market value.(in 3.84 YEARS!) If you think about things in 15 or 30 year terms you are totally screwed! 5 years, 10 years at the max. I said I would sell that house within 5 years the day I bought it (and everyone looked at me like I was a moron) but, it is one of my equity leverages now and is probably too good to get rid of. It has gained 66% value in 3 years(because I bought it in 2012 at the bottom of the market, AND below market value at that time) and has gained 39% from principle reduction. So basically a “God-like” investment. Thank God for wisdom! Stop trying to manipulate a few percentage points. Think bigger. Money is made at “the buy”.

The only rule is: Buy smart! Don’t try to save 10k$ over 30 years! Make 105% on your investment in 3 years… that is the goal IMO. It is totally possible. The banks foreclose on someone, pay 20K$ to remodel the kitchen and bathrooms and then sell the properties at 30-40% markup in a few months.

If you think in small numbers, that is what you will get.

IMO.

Colin RobertsonDecember 1, 2015 at 12:30 pm -T Shane,

You’d basically need to double your 30-year payment to pay it off in around 10.

Y HenryDecember 10, 2015 at 2:21 pm -Hello Colin-

I am thinking of refinancing my home.

I wanted to know if it’s wise to refinance (or just take out a loan) to fix up my home?

I am 4 yrs in on 30 yr…

I have been doing my research, but (honestly) I am still lost and undecided on the right steps to make.

Please advise

Thanks

Colin RobertsonDecember 11, 2015 at 9:51 am -Y Henry,

Read around this site to get a better idea of your options and potential strategies. It depends what your goal is for the loan/home…do you plan to stay a long time or is there a possibility you’ll sell? Lower rates make more sense for those planning to hunker down for a while. Conversely, you don’t want to pay for a lower rate (closing costs and so forth with a refi) if you aren’t going to keep the loan for a good amount of time. You also reset the clock on your 30-year loan if you get another 30-year loan, though you’re only 4 years into it. But if the rate is way lower it’s a much easier decision. Could also explore second mortgages (home equity loans/lines) as you alluded to.

Vern HainesJanuary 6, 2016 at 3:52 pm -I have 14 years left on a 30 year loan at 7%, I have finally got my credit score up to where I could refinance. Should I refinance to a 15 or 10 year loan or just keep the loan I have.

Colin RobertsonJanuary 6, 2016 at 4:07 pm -Vern,

You’re likely an ideal candidate for a refinance because your rate is so high relative to today’s rates. In order to stay on track (toward payoff) you’d probably want to switch to a 15-year fixed or 10-year fixed as you mentioned. Rates are closer to 3% today and you probably have a low LTV, another plus to getting a new loan rate.

Vern HainesJanuary 8, 2016 at 9:28 am -Thank you for your quick response to my question on refinancing my home even though I only have 14 years left at 7%. Would I have a better chance of getting refinance if I apply with my same mortgage company(wells fargo) or should I go with another one.Thanks. Vern.

Colin RobertsonJanuary 8, 2016 at 10:33 am -Vern,

Generally you should shop around to see the many options and pricing available to you. Wells may not have the best rate and fees. And sometimes existing lenders can talk you out of a refinance.

KimJanuary 16, 2016 at 7:53 pm -We have two mortgages on the one property as we upgraded to a bigger forever family home 8 years ago and the “extra” went on an 02 mortgage rather than face penalties on breaking the 01. Now both mortgages are due for a refix or float decision. One mortgage has only 97 months to go and is at $51,000. The other is at $40,000 and has 206 months to go . Both were initially 25 year terms. We want to fix one at 4.85% for three years and FLOAT the other at 6.24% but pay it off aggressively in the three years, then focus on getting rid of the other one. Which one should we float and super charge our payments on, leaving the other one ticking along on minimum payment? All the calculators I can find don’t take into account the amortization and how much further along the interest/principal curve each one is…I can’t pay the fixed one very aggressively as there is a limit of only being able to pay 5% of the remaining balance extra per year or we face tough financial penalties. Please help us make the right decision, thanks so much from New Zealand.

Colin RobertsonJanuary 19, 2016 at 5:39 pm -Kim,

You’ll probably find that the one with just 97 months has a larger percentage of principal in each payment. But perhaps both could be refinanced to lower rates and shorter/similar terms based on what remains on each. If you use a calculator to see total interest outlay on each (subtracting what has already been paid) it may help your decision.

MrDiojiFebruary 17, 2016 at 10:46 am -I am looking into refinancing and I’m thinking of doing a 25-year mortgage which would still have lower payments than the 28 years remaining on my 30 year. However, is there any advantage to doing that versus just taking the 30 year mortgage at the same rate and making the 25-year payments? That way I would still pay it off in 25 years, but have the flexibility to make lower payments if my future finances require that.

Would the amortization look the same if I took the 30-year and made the payments like a 25-year, or would I somehow still be paying more interest upfront, such that I will have less equity in 5 years than if I took the 25-year option?

Colin RobertsonFebruary 17, 2016 at 12:35 pm -Mr Dioji,

Your logic is sound. The only potential downside to the 30-year is it gives you an excuse not to stick to the 25-year plan. But that can also be a good thing if you get stretched too thin with the 25-year loan. And seeing that there’s no rate discount on the 25-fixed, the 30-year with extra payments could be a sensible play. Your call.

SteveFebruary 17, 2016 at 3:12 pm -Mr Robertson,

We made a huge mistake and are now trying to figure out what to do. We started off 29 years ago with a ARM and after about 15 years went to a fixed 30 year at 5.5%. On top of that we took out a home equity loan 10 years ago at 3% and put an addition onto our home and just yesterday we received notification that a huge increase in our monthly payment will begin this coming November. I’m 60 years old and my wife and I now realize we essentially have paid monies for 29 years and still almost have the same debt. Should we try to pay down our 5.5% loan asap or just except the situation and keep saving money in a 401K to maintain liquid assets or maybe a combination of the two? Any advice would be most appreciated.

Colin RobertsonFebruary 17, 2016 at 7:39 pm -Steve,

Most folks recommend paying off the mortgage before retirement, but this isn’t a reality for everyone. It’s a recommendation and something that’s not always easy to do. If the rate is due to increase, maybe you can refinance it into a low fixed rate or combine the two loans into one loan at a lower combined rate, or just refinance the first to a lower rate and use the savings to tackle the second if the rate is rising. You can probably do a lot better than 5.5% these days. As for how much to allocate to the mortgage(s) it depends on your personal financial goals. If you feel you’ll get a better return with the 401k vs. paying off the mortgage then that might dictate your decision. I’m not sure if you’re more concerned with monthly payments or paying off the mortgage, or both. Probably best to sit down and go through all your options and discuss with wife best direction. Good luck!

CathyMarch 1, 2016 at 12:23 pm -Hello – I was looking over my fathers loan documents and I am confused. He refinanced in 2007 to get my mother off the mortgage. Original loan amount is 175000 @ 7.95% interest (He needs to refinance again I know) – its a conventional loan without PMI.

When I looked at his amortization schedule, it shows that he will still have a balance of over 130,000 when his loan matures. Am I missing something?

Colin RobertsonMarch 1, 2016 at 4:31 pm -Cathy,

Could be a balloon payment? Maybe check the term of the loan to figure that out, regardless, as you noted, his rate is super high relative to today’s rates.

edgardo alemanMay 1, 2016 at 9:26 am -I still own $78000 of my mortgage from 22 more years to go and 8.99 interest. what is the best way to go non counting refinance. now i have a good job a good income which can allow me to pay extra $5,000 a year or pay right now $28000 to the principal. is it going to help me or just don’t make any sense?

Colin RobertsonMay 2, 2016 at 9:30 am -Edgardo,

It depends what your goal is…if you want to pay off the mortgage as fast as possible and you have extra cash that can be used to do that, you’ll save money on that 9% mortgage. The faster you pay the more you’ll save, but then that money is tied up in your home until your sell or cash out. You can also look into refinancing if it’s possible to lower the rate while also choosing a shorter loan term such as a 15-year fixed to pay it down even faster.

MattMay 27, 2016 at 8:53 pm -Colin,

Thank you for the clear explanation. I have a question about a payoff statement I received. My listing agent asked for me to get her the final payoff amount, and I got this over the phone from my lender. The lender then sent me a payoff statement which breaks down the number and gives me the date which that amount is valid up to. However, the statement then says, “Funds received after this date will require additional interest of $X per Month. The above calculations are invalid after month-end.” Why would the interest go up each month? Shouldn’t my total amount due to pay off the loan in full go down each month? Are they assuming I’m going to stop making my mortgage payments?

It is an FHA 30-yr loan. I have been paying biweekly for over 4 years.

ANGELAMay 29, 2016 at 8:54 am -We are 9yrs into a 15yr mortgage. Around year 3 I was making $100 extra principal each month through my bank. This lasted for about a year. The bank sold to another bank and the payment stopped.

Upset when that happened I did not continue. Can I resume the extra payments and still save or am I nearing the large-principle/small interest part of my loan?

Colin RobertsonJune 1, 2016 at 8:09 am -Matt,

Yes, it’s probably based on the assumption that interest will accrue as time goes on sans payments of said interest.

Colin RobertsonJune 1, 2016 at 8:19 am -Angela,

Try to find your amortization schedule on the lender’s website or simply plug in the numbers to see where you’re at and if it will benefit you.

KathyJune 10, 2016 at 11:04 am -We refinanced our mortgage in May of 2004 for $115,000 at 5.85 interest rate for 30 years. We have 89,904.00 left on the balance. I have been trying to pay extra just the last few months as my husband and I would like to retire but unfortunately cant because of the mortgage. What would be the best way to pay it off early. If I continue to pay $200.00 extra a month any idea how many years that would knock off? Or would it be best to refinance for 30 years at a better interest rate so our payment is smaller and then my kids will have to have whats left of the balance after we are gone? Not sure what to do.

RichardJune 16, 2016 at 7:50 am -Colin, is it possible to be making payments according to a 30 year amortization table on a loan but show a maturity date 15 years from the first payment date on my Note? I have a loan of $48,200 and have been paying $376.04 per month according to the contract thinking my loan would be paid off at the maturity date. I am 9 years into the loan and am only down to $42000 or so. Come to find out that the 15 year payment should be more like $477 and some change per month. At the end of my maturity date I’m still going to owe around $37,000. How is this possible? Is this a bank screw up? What do I do?

Colin RobertsonJune 24, 2016 at 3:56 pm -Kathy,

Rates are certainly a lot lower than they were in 2004 – potentially a couple points lower than what you have…in fact, you could possibly refinance to a 15-year fixed and enjoy a monthly payment that is comparable to your existing 30-year payment, and pay it off in half the time…well around 2031 vs. the currently scheduled 2034. And you could even make extra payments on top of the new 15-year payment or look at a 10-year fixed as well if you were really in a hurry to pay it off. Of course, you have to qualify for these options based on your income. Good luck.

Colin RobertsonJune 24, 2016 at 4:02 pm -Richard,

Is it a balloon payment maybe?