Pay me (Mortgage) Now, or Pay me Later! How it works

By mark-slade April 13, 2011

How To Refinance While Staying “On Track” To Pay Off Your Loan

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Comparing principal payback on 10-year, 15-year, 20-year, and 30-year fixed mortgages.
When a bank makes a fixed-rate, principal + interest mortgage, a borrower’s monthly payments is calculated using the principles of amortization (ah-mor-ti-ZAY-shun).
With respect to mortgages, amortization is the process of paying a loan to $0 over time.

Mortgages Are Interest-Loaded (At First)

For homeowners, a mortgage amortization schedule’s most important trait is how it renders mortgage payments interest-heavy at the start. There is very little principal that’s goes back to the bank each month.
If you’ve ever looked at your mortgage statement after a few years and thought, “I haven’t paid this thing down a bit!”, it’s because of amortization. Amortization schedules are decidedly “bank-friendly”.
At today’s rates, it would take 20 years to reduce the 30-year, fixed-rate mortgage’s amount owed by half.
Having said that, amortization schedules can benefit to homeowners, too. Because mortgage interest is often tax-deductible, the early, interest-heavy years of a loan can provide larger tax benefits than the loan’s later years.
Furthermore, an amortization schedule can be accelerated with “extra” mortgage payments.  Years can be shaved off a loan’s life with just some basic planning.

Comparing Mortgage Payback Schedules

Here’s some stats. Comparing $300,000 loans at a mortgage rate of 5 percent, after 10 years:

  • A 15-year mortgage has 42% of the original $300,000 remaining
  • A 20-year mortgage has 62% of the original $300,000 remaining
  • A 30-year mortgage has 81% of the original $300,000 remaining

After 15 years of payback, the numbers look similarly disproportionate:

  • A 15-year mortgage is paid in full
  • A 20-year mortgage has 35% of the original $300,000 remaining
  • A 30-year mortgage has 68% of the original $300,000 remaining

Depending on interest rates, amortization schedules will be skewed in more — or less — in favor of the bank. Higher rates increase the interest payments; lower rates increase the principal payback.
Today’s low rates favor the homeowner.

Refinance Without “Losing Years”

Amortization is tricky, but it’s easy to make sense of it with a worksheet in your hands. That’s where I can help.
If you’ve got an existing mortgage and want to see what extra monthly payments will do to your payback period, or want to know how to keep your “payoff period” on track after a refinance, click here to send me an email.
I answer all my own emails and am happy to help.