Amortization schedule

[Sgt Fury]

After reading J’s post on retirement, I thought to myself that there are a lot of younger people out there who would also like to retire early. Here’s a great piece of advice that I wish I knew when my parents were paying on their mortgage. I found out about it in my early 20’s after taking a money management class. Here goes: After you get a mortgage, call the bank and tell them you want a copy of the amortization schedule. Then print it out. If you have a 30 year mortgage, that will equal 360 payments (30 years times 12 payments per year). The first payment, let’s say $1000 to make it easy but it more than likely will be higher, $999 goes to interest while $1 goes to the principle (the amount you borrowed). Payment number two will be $998 toward interest and $2 toward the principle. You see, the bank gets all of their interest up front. You think you’ve put a dent in your mortgage by paying $2000 but you’ve only paid the bank $3 total toward your loan. So what you need to do is, put an extra $50 or whatever you can afford toward your monthly payment. Now $50 doesn’t seem like a lot on a $250,000 mortgage but bear with me. Now look on your amortization schedule....payment 3 says $3 toward your loan...payment 4 says $4, payment 5 says $5. Keep adding those dollars up until you get to $50. By sending in that 50 dollars, you just eliminated all of those payments with the heavy interest. Now you still have to make a mortgage payment every month, but by paying that extra $50, you just saved over $10,000 in interest payments. Cross off those payments that totaled $50 on your schedule with a yellow highlighter. Those are payments that you’ve already made, so you don’t have to pay the interest. Now if you look down on the schedule at the halfway point, you will notice on payment number 180 (the half way point of your 30 year mortgage) it will say $500 interest and $500 principle. Most people do not have an extra $500 to put down to save on $500 interest, that’s why it is important to do this at the beginning of the loan when the principle payments are still very low. You can pay off a 30 year loan in 13-15 years by doing this. I know it is tough when you have kids, car payments and other bills, especially when you are just starting out, but every dollar helps in the beginning of the loan. An hour or two overtime, saving money by packing your lunch, etc. will help you save tens and tens of thousands of dollars that you can use later down the road. The last payment on the loan will read something like $1 interest and $999 principle. The bank gets their money at the beginning of the loan. Any extra that you pay will save you ALOT of money in the end. I’m no financial wizard by any means but this is how I paid off my house early and it’s something that the banks are not going to tell you. If anyone isnt quite sure of this tip or needs it explained a bit further, pm me and I’ll give you a call to see if I can explain it better. You can also google Amortization schedule. Here’s hoping that everyone can follow J’s lead and retire early!!

 

["J"]

Another thing to look at is the bimonthly mortgage payment as well... Then add the 25.00 extra to that... Cuts the total payout as well...

 

[Sgt Fury]

Another thing to look at is the bimonthly mortgage payment as well... Then add the 25.00 extra to that... Cuts the total payout as well...

I wish I knew about the payment schedule when I was younger....by the time I found out, my parents were over the halfway point in their mortgage, so it was too late to do any good. They ended up paying the entire 30 years on it.

 

[Buckmaster]

The amortization schedule is probably the best method although the most disciplined technique. Bank autopay can make it easy.

On years I receive a tax return I make that extra 13th payment.

My tax guy suggested stashing those extra monies into a Roth IRA and making a lump sum payoff someday.

A blend would do wonders to a 30 year plan.

 

[5Cent]

Great advice, but there is a catch and I think we have discussed it a few times before. Both are smart financial decisions so one has to do what is best for them. What am I talking about , well opportunity cost of course.

That extra $ invested “could” yield a higher return. Market returns average 9% (over the time stock market data has been recorded), compared to the 3.5-5% interest you are being charged on the mortgage. Add in the fact that mortgage interest is tax deductible and you come out better in the end by investing.

If your goals are to be debt free as fast as possible, your recommendation is spot on. If your goal is to have the highest net worth possible by letting your $ work for you, invest. Get an emergency fund in place, create a monthly budget to stick to, and think long and hard on any big purchase before pulling the trigger. Just make sure you keep feeding the pig!

 

[Sgt Fury]

Great advice, but there is a catch and I think we have discussed it a few times before. Both are smart financial decisions so one has to do what is best for them. What am I talking about , well opportunity cost of course.

That extra $ invested “could” yield a higher return. Market returns average 9% (over the time stock market data has been recorded), compared to the 3.5-5% interest you are being charged on the mortgage. Add in the fact that mortgage interest is tax deductible and you come out better in the end by investing.

If your goals are to be debt free as fast as possible, your recommendation is spot on. If your goal is to have the highest net worth possible by letting your $ work for you, invest. Get an emergency fund in place, create a monthly budget to stick to, and think long and hard on any big purchase before pulling the trigger. Just make sure you keep feeding the pig!

My accountant kept telling me not to pay off my house early....it was the biggest amount of debt that I had and I wanted to pay it off as fast as possible because you don’t know what is around the next corner, (job loss, medical troubles etc) and I wanted to get that monkey off of my back. I may or may not have added to my “net worth” by investing but it was worth losing the stress of a large debt to me.

 

[Buckmaster]

I may or may not have added to my “net worth” by investing but it was worth losing the stress of a large debt to me.

Now you can rest a little easier during your sleep.

 

[5Cent]

My accountant kept telling me not to pay off my house early....it was the biggest amount of debt that I had and I wanted to pay it off as fast as possible because you don’t know what is around the next corner, (job loss, medical troubles etc) and I wanted to get that monkey off of my back. I may or may not have added to my “net worth” by investing but it was worth losing the stress of a large debt to me.

Absolutely nothing wrong with that, you had a goal and reached it!

 

["J"]

But, if you can when you pay off that mortgage take that amount and invest it at that time and you’re still ahead of the game. That is if you don’t get crazy with that extra cash in your account each month.... I added half my mortgage to my 401 when we paid off the house 15 years before I retired. Plus added the extra income from all the deployments as well. It all adds up as long as you stay focused on the end game.... A comfortable retirement. There are things I’d of done differently and been a little more aggressive in hindsight but I’m in decent shape financially compared to a lot I see in this age bracket. I was fortunate to have some older coworkers who were much more savvy them myself when I was younger and heeded their advice and had the wife kicking and screaming the whole way until one day I showed her the balance of the 401 and she saw the light.... We were never well off but lived comfortably and were able to treat the kids to vacations and they didn’t suffer because of it... They now see what saving for the future brings you and are both working towards it as well...

 

[Jackalope]

Some VERY solid advice in this thread. First and foremost like Adam said, get an emergency fund in place. Don't even think about paying down unsecured debt, a vehicle loan, or your house until you have a minimum of three months worth of operating income banked away. I prefer a minimum of 6 months. Enough to cover required living expenses like your Mortgage, car, utilities, phone, fuel, groceries, medical premiums if forced to pay cobra etc. The feeling of security and freedom just knowing that is there is immense. You don't have to worry about getting laid off or taking a risk of starting a new job and it not working out. Protect you and yours first, achieve financial security then work on financial freedom. The feeling of knowing that emergency fund is there is extremely comforting. Paying your mortgage off 15 years ahead of time does you no good if you get laid off at the 10 year mark and lose the house to foreclosure because you dumped every spare penny into a mortgage and a credit card balance. Everything the guys said above is extremely good advice but first get that emergency fund

 

[Sgt Fury]

Some VERY solid advice in this thread. First and foremost like Adam said, get an emergency fund in place. Don't even think about paying down unsecured debt, a vehicle loan, or your house until you have a minimum of three months worth of operating income banked away. I prefer a minimum of 6 months. Enough to cover required living expenses like your Mortgage, car, utilities, phone, fuel, groceries, medical premiums if forced to pay cobra etc. The feeling of security and freedom just knowing that is there is immense. You don't have to worry about getting laid off or taking a risk of starting a new job and it not working out. Protect you and yours first, achieve financial security then work on financial freedom. The feeling of knowing that emergency fund is there is extremely comforting. Paying your mortgage off 15 years ahead of time does you no good if you get laid off at the 10 year mark and lose the house to foreclosure because you dumped every spare penny into a mortgage and a credit card balance. Everything the guys said above is extremely good advice but first get that emergency fund

Good point! My wife fought me when I suggested we have a savings account for emergencies. I opened one up behind her back. When we needed money for a unexpected expense, I handed her the savings account book. We’ve had one ever since.

 

[hickslawns]

My wife got a second job. If I can get her to take on a third, I might retire tomorrow.

Agreed this is all solid input. If your goal is paying off your house early, there are several good ways to do it. My understanding on a 30 yr loan is one extra payment per year cuts 7yrs off your loan. Can be achieved by scrounging up an extra payment when you can. I've found splitting the 12 monthly payment in 2 ($500 if your payment is $1000), and paying $500 every two weeks rather than $1000 once a month is the easiest way. 52wks in a year, so paying every 2wks makes 26 payments per year. Equal to 13 monthly payments.

I'm guilty of not enough emergency fund. I figure I have enough stuff to liquidate if needed. Horrible plan but that is my plan. Otherwise there are lines of credit available. I hate using them so it would be a last resort thing.

 

[Jackalope]

Indeed Hicks. Nothing wrong with including liquidable assets in that plan. Especially if those assets can provide a return while in your possession. A skid steer lurched right and a qualified operator will bring you personally a far better return than any mutual fund, bond, or savings account.

 

[giles]

Yup, 6 months worth of bills and living expenses in the bank. Take the rest and apply it where you think is right. I’d suggest starting with whatever your highest interest loan is. No sense in paying off your house early at 2.5% if you have an $800 a month truck payment at 8%. Or a credit card at 12%. Pay off the highest and work from there.

Once you get ahead it’s easier, promise.

Another thing to think about is equity and assets.

 

[hickslawns]

Indeed Hicks. Nothing wrong with including liquidable assets in that plan. Especially if those assets can provide a return while in your possession. A skid steer lurched right and a qualified operator will bring you personally a far better return than any mutual fund, bond, or savings account.

If you look at it this way, I have more than 6mo of expenses at my disposal. I'd probably unload the toys before the tools that pay the bills though. Camper, motorcycles, Momma's hot rod. . . Gone. It is just stuff. I pay cash for toys. Just one of my rules. If you have to finance a boat/motorcycle/classic car/etc, then maybe you should wait until you can pay cash. Just "MY" rule for myself. Not knocking anyone who has financed stuff like this. Just my rule. Thus the reason I've never paid a ton for one of our "toys".