Working With Amortization Tables
Working with amortization tables can be very enlightening because it shows you, among other things, how much interest you have paid on a particular mortgage after a particular month's payment. This is important for gaining the knowledge of how much money you've spent that is actually wasted on interest. When you pay interest, you're simply paying for time and your getting nothing tangible in return.
When shopping for mortgages you'll probably be quoted different interest rates. At first, this may not seem very significant. When you analyze what a monthly payment on a mortgage will be, after escrow has been added for property tax and insurance you would probably see very little difference. However, you need to use amortization tables for a complete analysis.
Let use the following example: You are borrowing $250,000 for 30 years to buy your home. One lender quotes you 7%. Another lender quotes you 7.5 percent. After calculating for the monthly payments, you find that the 7% mortgage requires a payment of $1,995.91 each month. The 7.5% interest mortgage requires a payment of $2,097.64 each month.
While paying an extra $100 a month may seem bad enough, it takes in amortization table to tell you the whole story. With the 7% mortgage after the first month you would have paid $245.91 toward the principal. After the 36 months you would have paid $9,819.11 toward the principal. After the 240 th month, the 20-year mark, you would have paid $128,059.77. Here, you can see that after two-thirds of the loan's time has expired, you have yet to pay one-half of the principal.
With the 7.5 percent mortgage after the first payment you would have paid $222.64 toward the principal. After 36 months you would have paid $8,957.26 toward the principal. This is approximately $1000 less than you would have paid toward principal, and therefore would have in equity with the 7% mortgage. After 240 months, the 20-year mark, you would have paid $123,284.55 toward the principal.
Already you can see that you would have paid more principal, and therefore gained more equity, if you had taken the 7% loan, but the story is even more telling when you look at the interest difference.
After paying the 7% mortgage for 20 years, you would have paid $350,918.63 in interest. In the 7.5% loan you would have paid almost $30,000 more. Here, your interest payments would have totaled $380,149.05.
By paying each mortgage to its conclusion, the 7% mortgage would cost $418,527.59 and the 7.5% mortgage would have cost you $455,150.43 in interest charges.
As you can see, by taking the mortgage that had 7% interest you would have saved almost $37,000. The impact of these interest charges would be lightened by the fact that interest charges are tax deductible. That is to say they are tax-deductible now. However, you can never be sure when Congress may decided that anyone who owns a home is rich and therefore the interest rate tax deductions are "tax cuts for the rich." Therefore, they may make political hay with their constituency by ending these tax benefits.
In any event, getting the complete picture of what different mortgage scenarios look like requires checking out the amortization tables.