It’s important to understand your amortization schedule because you can use it as a tool to pay off your loan earlier and pay less interest while doing it.
Because the interest is calculated as a percentage of the current loan balance each month, as the loan balance is reduced, the amount of interest shrinks. For example, 6.75% on $299,500 is less money than 6.75% on $300,000.
If you’re like me, figuring this out requires too much math. Lucky for us, amortization calculators can show you how making an extra payment toward the principal will not only decrease your principal balance but also lower the amount of interest you pay. In effect, if you can afford to make extra payments, you can pay off your loan sooner and pay less interest over the course of your mortgage, depending on how much extra you pay toward your principal and how often you do it.
Important tip: Make sure you indicate in the memo portion of your check that the extra payment should be applied to the principal loan balance. If you are paying digitally, ask the customer service of your financial institution how to apply extra payments to the principal balance online.
I did this for my mortgage and my auto loan and saved myself thousands of dollars in interest – plus paid off both loans sooner than originally planned.
In addition to making additional principal payments, an amortization calculator can also demonstrate how biweekly payments could shorten the term of your loan and the total amount of interest you pay.
NOTE: Make sure your lender doesn’t charge a prepayment penalty.
Ask your lender or servicer (the company that you send your mortgage payment to) for help exploring how you can use an amortization schedule as a tool to make financially beneficial decisions. People do this all the time, so there’s no need to feel awkward!
Because no one likes paying full price for a sweater – or a mortgage – if they can help it.
