In the previous example, you see that each month as the loan balance goes down, the interest charge also goes down, but very slowly. Using the previous example you see that most of your monthly payment goes towards the interest until payment number 223. READ THAT AGAIN—after making 223 payments (18 years, 7 months worth of payments) you start to pay more towards principal than interest! Obviously then, the faster you pay the loan balance down, the less interest you pay.

Here is one simple way of saving money on those interest charges: when you make a prepayment on principal, you will save that months interest. Look at the amortization schedule again. When we make our first payment of $1,498.88 in January, add to that the principal portion of the February payment, which is $250.12, for a total first’s month payment of $1,749.00. By doing this, you have accomplished several things. First, you have gone from payment number 1 all the way down to payment number 3 and thus you will eliminate the $1,248.76 interest charge for February. You have just saved nearly $1,250 (over the life of the loan) by making a small $250.12 prepayment! In addition, you have shortened the length of the loan by one month. Instead of your mortgage being paid off in 359 payments from now; it will be paid off in 358 payments.

Lets continue: when we make our second payment in February, we make our $1,498.88 payment plus April’s principal payment of $252.63 for a total payment that month of $1,751.51. By doing this we will save $1,246.25 in interest that month. We have now made 2 prepayments, and will save $2,495.01 ($1,248.76 + $1,246.25= $2,495.01) in interest over the term of the loan and shorten the length of the loan by 2 months.

Now when we make our third payment in March, we pay the $1,498.88 plus June’s principal payment of $255.16 for a total payment that month of $1,754.04, and we save $1.243.72 in interest that month.

Let’s summarize; what we have done here is by making three monthly payments (January, February and March), prepaying the next month’s principal (as we have done three times) we will cut thee length of the mortgage by 3 months, and will save $3,738.73 in interest charges over the life of the mortgage. Once again, by making three small prepayments you will save nearly $3,800. By continually doing this—adding the next month’s principal payment to the base payment (in this case $1,498.88), you will cut the loan term from 30 years to 15 years and save over $160,000 in interest in the process! All this is accomplished by letting your amortization schedule act as your guide.