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Mortgage Acceleration Primer

Amortization Schedules
When a mortgage originates, the amount to be borrowed, the interest rate and term are defined in an agreement between the mortgage company and the borrower. With this information the mortgage company calculates the amount of the payment. After the payment is calculated, they can then calculate an amortization schedule. The amortization schedule is simply a schedule of principal and interest payment amounts. The following is a sample portion of an amortization schedule generated by Mortgage Minder. This schedule was based on a 100,000 dollar loan at 9.5 percent for 30 years.

|Pm|Date | Pmt Amt| Prin | Int   |Tot. Prin| Tot. Int| Balance  |
| 1|Oct96| 840.85 | 49.19| 791.67| 49.19   | 791.67  | 99,950.81|
| 2|Nov96| 840.85 | 49.58| 791.28| 98.76   | 1,582.94| 99,901.24|
| 3|Dec96| 840.85 | 49.97| 790.88| 148.73  | 2,373.83| 99,851.27|
| 4|Jan97| 840.85 | 50.37| 790.49| 199.10  | 3,164.32| 99,800.90|
| 5|Feb97| 840.85 | 50.76| 790.09| 249.86  | 3,954.41| 99,750.14|
| 6|Mar97| 840.85 | 51.17| 789.69| 301.03  | 4,744.10| 99,698.97|
| 7|Apr97| 840.85 | 51.57| 789.28| 352.60  | 5,533.38| 99,647.40|
| 8|May97| 840.85 | 51.98| 788.88| 404.58  | 6,322.26| 99,595.42|
| 9|Jun97| 840.85 | 52.39| 788.46| 456.97  | 7,110.72| 99,543.03|
|10|Jul97| 840.85 | 52.81| 788.05| 509.77  | 7,898.77| 99,490.23|
|11|Aug97| 840.85 | 53.22| 787.63| 563.00  | 8,686.40| 99,437.00|
|12|Sep97| 840.85 | 53.64| 787.21| 616.64  | 9,473.61| 99,383.36|

Take a look at the first payment, particularly the "Payment", "Principal" and "Interest" columns. Out of that 840 dollar payment only 49.19 was applied towards the principal amount of the loan. This means that after the 840.85 payment, the amount owed is still 100,000 minus 49.19 or 99,950.81 as shown in the "Balance" column. Now notice the rest of the payments and the way they are broken down. The payment stays the same, but the principal and interest amounts change. Each payment, the principal amount increases and the interest amount decreases. That is because the interest is calculated on the remaining unpaid balance of the loan, which is constantly being reduced (ever so slightly in the beginning) by the principal amount of the payment. At some point the principal amount of the payment will be more than the interest amount. One would think that this point would be the middle of the term, or in this case around the 180th payment. This is not true. In fact, with this loan the principal amount of the payment exceeds the interest amount around the 273rd payment. See for yourself.

|Pmt|Date |Pmt Amt| Prin  | Int   |Tot. Prin | Tot. Int | Balance  |
|271|Apr19| 840.85| 413.53| 427.33| 46,435.41|181,436.08| 53,564.59|
|272|May19| 840.85| 416.80| 424.05| 46,852.21|181,860.14| 53,147.79|
|273|Jun19| 840.85| 420.10| 420.75| 47,272.31|182,280.89| 52,727.69|
|274|Jul19| 840.85| 423.43| 417.43| 47,695.73|182,698.32| 52,304.27|
|275|Aug19| 840.85| 426.78| 414.08| 48,122.51|183,112.39| 51,877.49|
|276|Sep19| 840.85| 430.16| 410.70| 48,552.67|183,523.09| 51,447.33|
|277|Oct19| 840.85| 433.56| 407.29| 48,986.23|183,930.38| 51,013.77|
|278|Nov19| 840.85| 437.00| 403.86| 49,423.23|184,334.24| 50,576.77|
|279|Dec19| 840.85| 440.45| 400.40| 49,863.68|184,734.64| 50,136.32|
|280|Jan20| 840.85| 443.94| 396.91| 50,307.63|185,131.55| 49,692.37|
|281|Feb20| 840.85| 447.46| 393.40| 50,755.08|185,524.95| 49,244.92|

This is also almost the point where half of the loan is paid. That means it would take you over 23 years to pay off the first half this loan, which means the other half is paid in a little over 7 years!  Now look at the end of this loan.

|Pmt|Date |Pmt Amt| Prin  | Int  |Tot. Prin | Tot. Int | Balance |
|349|Oct25| 840.85| 764.94| 75.92| 91,175.29|202,282.83| 8,824.71|
|350|Nov25| 840.85| 770.99| 69.86| 91,946.28|202,352.69| 8,053.72|
|351|Dec25| 840.85| 777.10| 63.76| 92,723.37|202,416.45| 7,276.63|
|352|Jan26| 840.85| 783.25| 57.61| 93,506.62|202,474.06| 6,493.38|
|353|Feb26| 840.85| 789.45| 51.41| 94,296.07|202,525.47| 5,703.93|
|354|Mar26| 840.85| 795.70| 45.16| 95,091.77|202,570.62| 4,908.23|
|355|Apr26| 840.85| 802.00| 38.86| 95,893.76|202,609.48| 4,106.24|
|356|May26| 840.85| 808.35| 32.51| 96,702.11|202,641.99| 3,297.89|
|357|Jun26| 840.85| 814.75| 26.11| 97,516.86|202,668.09| 2,483.14|
|358|Jul26| 840.85| 821.20| 19.66| 98,338.05|202,687.75| 1,661.95|
|359|Aug26| 840.85| 827.70| 13.16| 99,165.75|202,700.91|   834.25|
|360|Sep26| 840.85| 834.25|  6.60|100,000.00|202,707.51|     0.00|

The payments are still the same, but the principal and interest amounts have switched places. Now the majority of the payment is showing in the principal column and the smaller amount in the interest column. Again, this is because the interest is calculated on the unpaid amount of the loan. Toward the end of the loan, the unpaid amount is smaller therefore the amount of interest paid for those payments is smaller as well.

Mortgage Acceleration
The idea of mortgage acceleration is to pay an additional amount towards the principal portion of the loan to reduce the principal and reduce the amount of interest charged for the next payment cycle. I think you will be surprised when you see the difference that just a few dollars each month can make.

Using the same loan as an example, would you believe that you can save over FIFTEEN THOUSAND dollars over the term of the loan by sending only 10 dollars a month extra with your payment! You will also cut 1.75 years or 22 payments off the term of the loan. If you pay an extra 25 dollars each month, you save almost 33,000 dollars in interest and cut the term to 26 years! How about 100 dollars extra each month? You'll save over 80,000 dollars in interest and pay the loan off 10 years early!

Now for the trick question of the day. The normal payment for this loan is 840 dollars. How much do you think you would have to send each month in order to pay the loan off in half the normal term? Double the payment to 1680 dollars? Maybe a little less? Would you believe that if you paid an extra 205 dollars each month, you will pay this loan off in 15 years!! And in the process, save over 115,000 dollars in interest! YES, that IS 115 THOUSAND dollars! Are you ready to you get started?

Get Started Now! (this is very important)
Now all you have to do is decide how much you can send each month. Decide now and get started right away. The longer you wait, the more money you could have saved. For example, if your loan was like the example we have used throughout this document, you will save almost 83,000 dollars by paying just 100 dollars extra each month, IF you start with the first payment. Now what if you waited a year or two and then started the extra payments? Well, if you started the extra payments on the second year, you will still save over 76,000 dollars. So that means the extra 1200 dollars in payments that you would have made the first year would have been worth 7,000 in interest savings. If you wait until the second year, your savings drop to just under 71,000 dollars, which is still good, but not as good as if you start with the first payment. The point here is to get started as soon as possible. The sooner you start, the more you will save.

NEW Mortgage Minder 3.0
Mortgage Minder is a software package for Windows designed to help you calculate the right amount to send as an extra principal payment. With Mortgage Minder, you can try several scenarios and see instant feedback to help you decide what plan is right for you. In addition, once you start sending extra payments, you can use Mortgage Minder to track your progress by updating your saved data file monthly. You can even print reports if you prefer reading the data in printed format. Mortgage Minder 3.0 new for 2002 now supports Canadian mortgage calculations and variable interest rates. For more information about Mortgage Minder, feel free to send me an e-mail , download the fully functional demo, or check out the on-line live demos.


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