Mortgage UPDATE

January 5, 2016

Taylor Ortiz’s Mortgage Memo

Today’s Topic: Amortize: reduce or extinguish (a debt) by money regularly put aside.

The new year is very often a time to review one’s financials so there is no better time to re-visit how a loan behaves.

The basics – Let’s use a $100,000 loan at 5% interest.

One month’s interest on this loan is $416.66 (100k X .05 / 12). Daily interest is $13.70 (100k X .05 / 365)
The 30yr Principal and Interest (P&I) would be $537.
Every month the principal balance goes down so less interest is charged and more of the payment goes to principal. Here is a 30 year look at how the payment allocation changes.

For those of you (or your clients) who want to pay off your loan faster here are some rules of thumb.

Paying money for a bi-weekly program doesn’t make sense. Those work because you make an extra payment every year. Make extra principal payments on your own every month and do the same thing at no cost.

For every $10,000 you borrow at 5% an extra $5 a month knocks off about 5 years. So at 100k to knock off 5 years you have to pay an extra $50 per month (100k / 10k = 10 so 10 x 5 = 50). And at 200k an extra $100 a month makes the loan go away in 25 years.

This is a simple example, but your transaction could more complicated. Doubling the extra (for example) does not give you 5 more years off the loan. That requires some more math. I very often produce amortization schedules for borrowers who want to see what they need to do reduce the loans terms and we’re happy to do that. We can also show how extra payments will affect your future loan payoff (equity) 3 or 5 or 10 years into the future.

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