Yesterday, I discussed what an amortization schedule actually is and how it is used with loans.  I provided an example of a mortgage that you had just taken out with an originating loan balance of $250,000.

But what if you opt to add to your payment to pay your loan down a little quicker.  First, make sure your lender will allow you to make extra payments.  Most of them do but some don’t so it doesn’t hurt to ask.

If you opt to add more money to each payment every month, your principal amount increase each month and your interest will decrease.  It is to your advantage to add to the principal if you can to pay your loan off sooner.

Now what would happen if you rounded up to $1,550 even?  That a mere $10.71 extra every month.  Sounds doable, right?  So how does that affect your loan?  For your first month, your interest would still be $1,302.08 but your principle would be $247.92.  In your second your interest would be

$1,300.79, and your principal would now be $249.21.  You will say that’s not a lot of change but let’s take a look at the beginning of your second year.  Your interest rate would be $1,286.14 and your principal would be $286.87. Your balance on the loan would be $246,674.38.  You’ve already paid your mortgage down by an extra $143.66.

If you continue to pay that extra $10.71 each month, you’ll pay the loan off in 29 years and 5 months instead of 30 and you’ll save $7,251 in interest.

Moral of the story:

Using an amortization schedule and paying extra on your mortgage or car payment can save you a significant amount of money in interest.  If you can even add a little, it will make a huge difference over the length of the loan.

.