Lowering Payment on an Amortized Plan

When you get a loan, you will receive a printed copy of your payment plan. It will appear in spreadsheet form with multiple columns. These columns will have labels such as “balance due,” “payment total,” “principal due,” and “interest,” and there will also be a column with the number of payments you need to make. If your payment plan is amortized, the numbers in the “payment total” column will be exactly the same.

If you are looking to lower your monthly payments, you can best do so with an amortized payment plan. This type of payment plan can apply to any type of loan, especially mortgage, credit card, or student loans. The earlier you are in the payment plan, the better chance you have of lowering your monthly payments. The way to do it, though, is to make at least one higher payment.

You can manipulate the numbers by plugging them into an amortization schedule calculator. The best one I have found is at bankrate.com, and I like this one because you can actually see how making just one payment above the minimum amount will affect the rest of the payment schedule.

For example, a 30-year (360 months) mortgage loan of $165,000, with a seven percent interest rate, has just been created. I can plug in these numbers to see that each monthly payment will be $1,097.75. I can also see how much of each payment goes toward the principal and how much goes toward interest. Obtaining a $165,000 loan does not mean I will be paying $165,000 back. With a seven percent interest rate, I will actually be paying back $230,189.68. I will do so if I just pay the minimum monthly payment.

The amortization calculator at bankrate.com also allows me to see what will happen if I wish to make a higher payment. Keep in mind that even just one payment above the minimum can save you a lot of money in the long run. With this $165,000 mortgage in my example, I have decided to add $200 to my first payment. My first monthly payment will then be $1297.75, and the extra $200 will go toward the principal, not the interest. If I make the minimum monthly payment for the final 359 months, the total amount I will have to pay for the mortgage is $228,778.79. (My last payment will also be in Nov. 2040, instead of Dec. 2040.) That means I will be paying $1410.89 less, and just because I added $200 for one payment.

If you can add a little extra at the beginning, you will still have to pay the minimum monthly payment, so while your monthly payments will not lower, your ultimate “payment” will be a lot less. If you like to play with numbers, I highly suggest looking at the online amortization calculator.

David Pilley

David Pilley

David Pilley is a May 2010 graduate of the University of North Carolina at Chapel Hill, with a B.A. in communication studies and a creative writing minor. He is a native of Raleigh, North Carolina.

He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.

Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.

In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.
David Pilley

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