Amortization Game - Fun For the Financially Obsessed

Ever played with an amortization table? It is almost as much fun as playing Grand Theft Auto. Well, almost as much for violence avoiding, blood-spatter adverse data geeks.

What is so fascinating is seeing, in detail, the affect a few bucks here or there can have on your mortgage commitment; the total interest paid over the life of the loan, and your mortgage payoff date.

There are hundreds of websites that have mortgage calculators with amortization schedules free. A good example of a site with a free amortization calculator schedule is HomeLoansLocal.com.

One of the first questions confronting a borrower, particularly one who is refinancing is: Do I want a 30 year mortgage or a 15 year? Try it just for fun. Plug in the amount of your mortgage and calculate the amortization schedules for both 30 years and 15. For discussion purposes we are going to use a $100,000 mortgage at 7 percent even though that wouldn't permit you to buy or refinance a 10 year old pop-up camping trailing in most of the country. At least it is easily multiplied.

Pretty dramatic, huh. The 30 year carries a monthly mortgage payment of $665.00 principal and interest while the 15 required a much higher payment of $898.00 which may be beyond the reach of many first time buyers but possibly affordable if you are at a point when refinancing becomes a possibility. Remember we are talking only (only?) $100,000 here so in your neck of the woods you may have to multiply that amount two or three times and nearly everywhere you will have to add in property tax and insurance escrows. Even the 30 year payment might be a stretch. (In reality the 15 year will probably carry a slightly lower interest rate, 40 basis points (0.40 percent) or so, but, for our purposes, it won't make a lot of difference, our point is the short and long term effect.)

Note that, while the payments are higher, at the end of the full loan period the 15 year mortgage will cost the mortgagor $61,789 in interest while the borrower who is in for 30 years will put out $139,508 over the years in interest payments.

From the standpoint of your financial future, choosing the 15 year loan is the obvious choice, but it may well be too much to handle. Even if you are in a position to pay the extra $233, $466, or $699 each month are you sure you will always be able to do so? Even a temporary reversal of fortunes - an unexpected medical bill, home repair emergency, a job loss - could throw you and your mortgage payment into trouble. A mortgage note does not allow you to say, whoops, I made a mistake.

You can always take a 30 year mortgage but make the payments as would be required under a 15 year every month for the life of your loan. Aside from the small extra amount that you won't save by getting the 15 year rate break, you will accomplish the same thing, the mortgage is accelerated and paid off in 15 years and you have saved ... in interest without locking yourself into a high payment.

But that extra payment is probably no more affordable as a voluntary payment than a required one, so let's take this a little further. The mortgage calculator allows you to make extra payments every month or every year. An extra payment - $665.00 - made once a year and look what happens. Your loan is paid off in April 2029 - more than six years early, and you will save $34,465 in interest.

But here is the real secret to accelerating your mortgage payoff with minimal hardship. Look at the 30 year schedule you printed out at the beginning. The first payment you are scheduled to make in August, 2005 is allocated $583 to interest and $81.00 to principal. In the first year you will pay $7,980 and pay off $1,016 of your principal, an average of $84.87 per month. If you just double the amount of that average principal each month you will be burning your mortgage in February 2027 and paying $93,886 in interest.

If this is too much, pay 50 percent of the double principal ($42.33) and pay your mortgage off exactly five years early. Even an extra $20 per month will save you about $15,000 in interest over the life of the loan.

If you have an existing mortgage with 15 or 25 years left to payoff, the amortization game can be even more fun. Plug in the information from your last monthly statement (or call and ask for a payoff balance) and start plugging in some figures.

Most web site amortization calculators won't let you play out all the scenarios - for example making two extra mortgage payments a year, tracking random extra payments as you make them, or even accurately computing a bi-weekly payment, but if you are facile in Microsoft Excel you can create your own Excel Amortization Schedules using the program's templates.

One thing to be careful about in making extra payments is that your loan servicer is equipped to handle them. Most coupon books and monthly statements have space to indicate your intentions but loan servicers have been known to throw the extra funds into escrow accounts. If you pay on-line through your bank (as opposed to on-line with the servicer) you might be wise to call them for directions before you begin the extra payments.

Once you find out how much money you can save with a few extra dollars, you probably won't be able to stop accelerating that amortization table. When you think about the reality of saving money today, it is hard to find many relatively safe investments that will guarantee you the return that accelerating your mortgage payoff will. Even if you don't keep the mortgage for 30 years or if you sell the house at the end of five years take a look at how much you will have increased your equity. And that is money in the bank.