Why aren’t loan amortization schedules talked about more than taking out a loan? When taking out a loan, the usual gets discussed, the monthly payment amount and interest rate and the timeline. Then taxes and insurance get calculated and added, but how much interest are you paying over the life of the loan? How much are you paying towards paying down the principal those first few years? Pablo recently mentioned a statistic that most people move within the first ten years of buying a home.
During that time, you’re mostly paying interest, not principal. Loan amortization schedules open the books and tell you exactly how much of your monthly payment goes towards the principal, the actual loan balance being paid down, how much is going towards interest, the cost of borrowing that money. With that information, you’re able to create strategies to pay off your loan more effectively, maybe additional payments on top of your regular expenses, do your due diligence, and you should find a plan that fits you to help you pay down that loan quickly. If you have a reasonable interest rate, some people argue that it’s best to keep that loan VS. paying off the home because of the tax write-off on the interest.
However, as of now, there are some tax write-offs on the interest you pay towards a primary residential home; consult with your CPA. Knowing where you stand on your loan by pulling out that schedule and pulling out an online calculator is a great first step. If you’re thinking of buying a new property, you can easily pull that loan amortization calculator out and see how much you will be paying in interest and decide if you want to move forward with it. You can use a loan amortization table to your benefit and calculate a time frame that works for you.
You can shorten the length of that loan, and you can make more payments towards principle, therefore reducing the amount of interest you’re paying over the length of the loan. If you have a 30-year or a 15-year loan, then you can manipulate those payments to your benefit and see what options you have on the calculator. Many people may have times where they’re doing well at work or they’re making more money than expected, then maybe those are the periods to choose to over-pay on that loan so that you decrease your debt tremendously. At the beginning of the loan period, most of your payment is going to interest and very little to the principal. To offset that, many people try to make an extra payment even in the first year of the loan’s inception.
You need to know what the interest rate is; you need to know the length of time. You need to see the amount of debt that you’re incurring when you have those three items. You can sort of change the loan amortization table to fit your needs as you move forward. Most people get into a property and have no idea how the mortgage payments terms work or how to change them to their benefit. Understanding the loan amortization schedule will put you in a great position to succeed.
Contributors: @MichaelPomes, @PabloFPomes
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