Math works, kids – or, why I love Excel – or, does adding principal really shorten your loan that much

I recently bought my second home. Or, to be more accurate, the bank recently bought my second home (and how old am I that I consider a year ago recent?). After about thirty years I will have bought it. Thirty years. I was 39 when I signed the contract (only months away from being forty) and the thought of still paying on my house when I was 69 just didn’t work for me. My life plan had always involved me being retired before sixty. In a perfect world, at 55 -we’ll see how that goes.

When I bought the first home, I was poor as fuck. My monthly payment on that was (and still is) about five-hundred dollars a month, and that was about all I could afford to pay on it. That contract is scheduled to be completed in 2032. About five years into that contract, I got a major upgrade in the job department. This allowed me to start adding principal to the monthly payments. Unfortunately for my love of data, I was all punk rock about it; I just threw some extra money on principal depending on what I had left over from each paycheck. Sometimes it was twenty bucks, sometimes it was three-hundred. Because of the lack of records, I don’t really know how much I’ve applied to the loan to know just how effective it is. What I do know is that when I sent in my payment for the month of May, 2015, my loan balance was equal to what it should be in August, 2021. Or, roughly six years ahead of schedule.

This loan is going away extremely quickly though, because I don’t intend to make payments on two mortgages for any longer than is strictly necessary. The aforementioned five-hundred dollar monthly payment only applies $168 to principal, but I’m currently adding just under $400 a month to principal on top of that. I can see each month that the remaining balance is coming down in chunks which skip several months in the payment schedule. Which is to say that this month’s payment put me where I should be in August, 2021, while next month’s payment will leave me where I should be in November of 2021. This handy amoritization calculator allows for added payments beginning with payment number ‘x’, and according to it, ignoring all added payments prior to February of this year, I will have shortened the loan by 130 months – nearly eleven years. This fits in with my expectation of having that mortgage paid off by 2019. I just don’t have any solid data on the prior added payments to know exactly how much the previous added payments helped me.

And if there is one thing you should know about me, it’s this: I love me some data! If something can be broken down into a spreadsheet, I’m breaking that shit down. That desire is almost so pervasive as to be an illness…

The plan was to pay only the required monthly payment on the second mortgage and apply everything I could to that first loan to try to pay it off as quickly as possible. But since the second loan payment is $611.42, I decided from month one that I would just go ahead and round that up to $700, applying the extra $88.58 to principal. I have been doing that each month, and I made my twelfth payment recently. Now I get to see data in action!

Below you’ll see my loan payment information for the first twelve months, as calculated by this payment calculator. I chose this one in particular because I have twelve months of actual data to compare the their calculator to check its accuracy. I am actually ahead of this schedule by $9.86, but this was the closest to accurate that I was able to find.

Payment Interest Balance added Interest Balance
1 Apr-14 $462.73 $346.88 $89,884.15 $88.58 $346.88 $89,795.15
2 May-14 $462.73 $346.43 $89,767.85 $88.58 $346.09 $89,589.51
3 Jun-14 $462.73 $345.98 $89,651.10 $88.58 $345.29 $89,383.07
4 Jul-14 $462.73 $345.53 $89,533.90 $88.58 $344.50 $89,175.84
5 Aug-14 $462.73 $345.08 $89,416.25 $88.58 $343.70 $88,967.81
6 Sep-14 $462.73 $344.63 $89,298.15 $88.58 $342.90 $88,758.98
7 Oct-14 $462.73 $344.17 $89,179.59 $88.58 $342.09 $88,549.34
8 Nov-14 $462.73 $343.71 $89,060.57 $88.58 $341.28 $88,338.89
9 Dec-14 $462.73 $343.25 $88,941.09 $88.58 $340.47 $88,127.63
10 Jan-15 $462.73 $342.79 $88,821.15 $88.58 $339.66 $87,915.56
11 Feb-15 $462.73 $342.33 $88,700.75 $88.58 $338.84 $87,702.67
12 Mar-15 $462.73 $341.87 $88,579.89 $88.58 $338.02 $87,488.96

You’ll see there that I am about $1100 ahead of schedule after just twelve payments (and as I said before, I am actually $9.86 better off than the calculator shows). That makes sense, since $88.58 x 12 = $1062.96. But where the data really gets interesting is down the table a ways:

Payment Interest Balance added Interest Balance
257 Aug-35 $462.73 $152.56 $39,273.81 $88.58 $3.29 $306.03
258 Sep-35 $462.73 $151.37 $38,962.45 $88.58 $1.18 $0.00

The payoff with my current additional monthly payment will be 8.5 years ahead of schedule. But the part that I find interesting is the difference in the balance in September of 2035. It is 38,962.45 without additional payment, 0 with additional payment. At that point I will have been paying on the loan for 256 months, and have paid only an extra $22,676.48 to principal. So $16,285.97 just disappears over the course of twenty years. Free money!

There still is an unknown factor to all this though. My first mortgage payment (the one which with current payments will end in 2019) keeps going down. After each twelve months of payments, they send me a revised loan statement with a lower monthly payment. It’s like they don’t want me to pay it off early. But I don’t lower my payment, I make the same payment, but apply the difference to principal as well. So with each passing year, the additional amount applied to principal goes up. Unfortunately I don’t know how the back end of this works to know how they calculate how much to lower the amount, so I can’t add that into these calculations.

There are a lot of fun numbers I can come up with using those calculators. For instance, once the first loan is paid off in 2019, if I start applying that extra $400 a month to the second loan, I will cut a full 17 years off of the length of the loan. I don’t think I will realistically be able to keep up with a payment that high, but it is fun to do the math.

My purpose here was not to get into theoreticals though. My purpose was to put down some real world numbers, from a loan that actually exists, to compare to the numbers from a calculator. I can look at calculators all day long, but without those results they are just numbers.

Does adding a little money to principal every month really work like the calculators say? Yes, it does. Almost exactly.

If you aren’t doing this, you really should consider it. If you have a $100,000 loan with 5% interest, your monthly payment will be about $537 (principal and interest only). If you add just $20 extra to that each month, you will shorten the length of the loan by almost 2.5 years and save over $8500 in interest. If you go a step further and just eliminate that $2.59 can of Monster that you buy on your way to work each day, applying the $56.12 that this will save you each month to principal on that same loan will pay it off over 5 years ahead of schedule and save over $20,000 in interest.