The easiest way of seeing the monthly breakdown of your loan is by using an AMORTIZATION SCHEDULE. What is an amortization schedule? An Amortization schedule is a statement that shows the monthly allocation of principal and interest and also shows the remaining balance of your loan. Below is a partial amortization schedule utilizing our mortgage example.

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.

After your first prepayment you may want to call your lender to verify that they credited your prepayment to the outstanding balance. When I started to prepay my mortgage, I waited 6 months until I checked my balance. MISTAKE!! I called to verify my mortgage balance, and their amount was VERY different from mine. The bank was not applying my additional payments to my mortgage balance; they were applying it to my escrow account. I then printed out my amortization schedule and sent it to them to show the correct balance. They quickly corrected their mistake. Lets face it, we balance our checkbook each month, why not use an amortization schedule to check you mortgage balance.

While we do not recommend emptying your bank account to payoff your mortgage, think of prepaying as another part of your overall financial strategy. The concepts on this site also apply to other types of loans (i.e., credit cards, auto loans).

The plans described on this site have been used successfully by thousands of our readers since 1988.