In fact, right now you will learn how to build your amortization table. Then you'll see how to use this table to pay off your mortgage quickly and then parlay those savings into big-time money.
What to enter into an amortization table calculator
Most amortization tables are simple to construct when you are using a good online amortization table website. All you need to do is input the total amount of the mortgage, the interest rate and the length of the mortgage. Some amortization calculators ask for the length in years, others ask for it in months, for instance, 360 months instead of 30 years.
After you click the calculate button you'll see your amortization table. You will notice each month's payment is broken down into two parts, interest and principal. You'll also notice the interest part of the payment; at least in the early part of the mortgage, will be by far, the higher number. This is because each of these early payments consists of much more interest than principal. It is this dynamic we're going to use to save a lot of money.
An example in big money saving
This method will work with any mortgage, but for our purposes, we'll use these fictitious numbers. We have a mortgage of $225,000. The interest rate is 7.25%, and the length of the mortgage is 30 years. When we enter these numbers into our amortization table calculator, we find the monthly payment to be $1,534.90.
When we look at the first payment, we see that out of this $1,534.90, $175.53 goes toward principal and $1,359.30 to interest. When we look at the second payment we see, $176.59 will go toward principal and $1,358.31 will go toward interest.
If we pay the second payment's principal part, $176.59 upfront, or at the same time as the first payment, we will save the $1,358.31 in interest. Why do we save all this money? Because after we make our first payment, we will have a balance remaining on the mortgage of $224,824.48. The difference between how much interest we pay for borrowing this amount of money for 359 months and 358 months is $1,358.31. So, by paying $176.59 with the first month's payment, we will now be on time to pay this mortgage in full in 358 months instead of 359. Yes, this is amazing!
Now, if we go on down the line paying the principal amount of the next payment due, ahead of time each month. We will be saving the corresponding much higher interest charges.
It does get a little more expensive.
As time goes on, the principal payments get higher and the interest gets lower. Still, after two years, the 24th payment, the principal is only $201.61, and after six years, the 72nd payment the principal is still $269.20.
If we stopped paying our principal payments ahead at this time, we will have knocked three years off of the time it would take to pay our mortgage off in full. This would happen because we would have paid three years on time and three years ahead of time.
Payoff a 30-year mortgage in 15 years
What if we want to pay off the mortgage in 15 years? Here's the secret. Go to the 180th payment. Here, you'll see that principal part of the payment is $515.93. If we add this amount onto each of our payments from the first payment of our mortgage to the 180th payment of our mortgage, the mortgage would be paid in full in 180 payments, or 15 years.
$515.93 may seem like a lot to pay upfront, but even if you were to take the principal part of payment number 55, $243.00, and add it on to each payment, you would have your mortgage paid more than 10 years sooner.
Summing it up, you can use this as an approximate formula: On a 30 year mortgage, add to each payment, the amount equal to the principal part of payment number 180 and you will have the mortgage paid in 15 years. Or, add to each payment, the amount equal to the principal part of payment number 55 and you will have the mortgage paid in 20 years. While this formula doesn't work perfectly for interest rates over 10%, for interest rates around 7%, it is fairly accurate. Now, let's see how to turn that savings into wealth.
Invest the savings
You could, of course become a real estate investor, but for simplicity sakes, let's just say you invested $1,534.90 each month in a managed fund that returns 10% yearly. After 10 years you would have $318,127.75. Also, don't forget you would have a house, which would be paid in full. I'd say you're pretty close to being rich and it all started with learning how to use your amortization table.