Prepaying Principal as per an amortization schedule


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Prepaying Principal as per an amortization schedule

Before computers became common household appliances an old tried and true method of prepaying principal on a mortgage without having to recalculate the amortization schedule, after each prepayment, was to prepay principal as per the amortization schedule. If this method is followed exactly, the only amortization schedule you will ever need (obviously your interest rate must remain constant over the term) is the initial amortization schedule that your lender gave you on closing day (or should have).

Lets use the example of $300,000 at 7% amortized for 25 years with monthly payments of $2,120.24. The mortgage is completely open.

This method works for all blended payment amortization schedules regardless of the “type of compounding” used.

If the 300 payments are made as per the amortization schedule the total interest paid would be $336,101.16 as can be seen in the powder blue SPREADSHEET interest line.

If the principal portion, $381.27 (green cell) of payment 6 is prepaid along with payment 5 on March 15th 2007 the interest savings is the interest portion of payment 6 which is $1,739.07. In other words, by prepaying payment #6 principal one month in advance you save payments #6 interest portion.

This is easily verified by subtracting the SPREADSHEET interest of the second amortization schedule, $334,361.09 (that shows the prepayment made) from the SPREADSHEET interest of $336,101.16 from the regular amortization schedule.

The result,

1.. Interest savings of $1,739.07
2.. Reduced amortization period by one month.
3.. Cut out payment line #6 in the initial amortization schedule and the resulting amortization schedule is MATHEMATICALLY accurate and intact. The dates wont be correct and you will need to subtract one from all the payment numbers.

A little extra effort but you will not have to recalculate or print the amortization schedule or pay someone to do it for you.