I don’t understand amortization – can someone help?

[trbo20]

If I took out a 30yr house load for 100k today, the bank does an amortization schedule and charges me equal continuous monthly payments for 360 months. I’m told that approx. the first 5 years are spent paying off the interest, then you start paying the principle after that.

My question is this; If I make double payments every month and pay the loan in half the time, then have I still paid for 30 years worth of interest? It seems like I wouldn’t be doing myself any favors in this situation. How could this be? They would be charging for interest that never had a chance to accrue.

Many thanks in advance.
-Tim Baur

[34saving]

Re: I don’t understand amortization – can someone help?

Basically, the quote "the first 5 years are spent paying off the interest" is wrong. Each month you will pay all of the interest for THAT MONTH and some principle. Each month the amount of principle will increase and the amount of interest will decrease. The quote is kind of accurate because in the beginning you'll be paying A LOT more interest than principle. If you pay off early you'll help yourself by have less principle to pay interest on. If you make double payments you'll pay off your loan in about 10 years and save about $70,000 in interest. (I think . . .but I'm sure others will correct me if I'm wrong )

[cicy33]

Re: I don’t understand amortization – can someone help?

I also think that you are supposed to specify that the extra is to go to principal, though not sure about that.

[terry1156]

Re: I don’t understand amortization – can someone help?

Yes, you want to make sure that yuo specify the extra payments are going to your prinipal (as opposed to extra interest payments) and that your loan doesn't have a prepayment penalty (most don't, but a few do).

While making extra payments on your house can be a good thing, you probably want to have all your other debt (credit cards, car loan, studen loan) paid off first.

[trbo20]

Re: I don’t understand amortization – can someone help?

Thanks for the tips. I guess that makes sense, what I saved is time -- time making payments. I didn't think of it like that. My credit cards are paid off and my student loan interest is lower than the house, so my goal is to have the house paid off as soon as possible.

[terry1156]

Re: I don’t understand amortization – can someone help?

my student loan interest is lower than the house, so my goal is to have the house paid off as soon as possible.

You will need to take a close look at this to see which is better for you to pay off first. If there is a big spread and the student loans are at a much lower rate, then the house payment may make more sense. if the rates are close, you need to remember that there are some tax advantages to the home loan (it being deductible) plus it often makes it so you have enough to itemize deductions on your tax return so you can claim other deductions (charitable giving, etc) that you probably couldn't without the house loan (because the standard deduction would be higher)

[trbo20]

Re: I don’t understand amortization – can someone help?

Yeah, I hear you, but the way I see it (and this is probably fairly irresponsible) If I hit hard times they aren't going to foreclose my education. I want the security of knowing that no matter what else, I own my home outright. Besides, student load tax is deductible and with my wife's company, we'll always itemize.

When I’m ready to upsize my house, the plan is to double the value of the home and pay off half of it outright. It would make us more competitive buyers.

[34saving]

Re: I don’t understand amortization – can someone help?

There's a huge emotional bonus of owning your house free and clear. I think it's a good goal even if there are some paths that might lead to a bit more money.

[akaivyleaf]

Re: I don’t understand amortization – can someone help?

I'm a number's cruncher so I did an amortization table on a 100,000 home with 5.33% interest over 30 years. Not counting taxes, insurance and other fees tacked on to mortages the payment would be 557.17 a month. Over the first year, you pay about 440.00 a month towards interest. This progresses at a terribly high percentage until it switches over at about month 205 where interest is 278, and the principle payment is 279. Bottom line, for the convenience of using other people's money, the 100,000 house costs 200,580 if you don't pay more principle than interest per month. Sure there are tax benefits, but I agree that there is miore satisfaction in owning my home free and clear than I've ever felt from doing business with uncle sam.

Something as simple as paying 100 a month extra towards principle will cut a 30 year mortgage down to 21 years.

I have an excel spreadhseet that details this, you just fill in the blanks and it calculates all of these things for you. If interested e-mail me at akaivyleaf@yahoo.com

[jmjj215]

Re: I don’t understand amortization – can someone help?

If I hit hard times they aren't going to foreclose my education. I want the security of knowing that no matter what else, I own my home outright.

What's the outstanding student loan balance, your interest rate? What's the outstanding mortgage balance and its interest rate? I can understand wanting a house free and clear if you hit tough times - but man, if you ever get mixed up w/ government student loans, they can garnish you w/o even taking it to court.

So, I'd just like to know the answer to my questions above, then take a look at the budget, then go from there in deciding.