Amortization..

 or

What does Death have to do with my mortgage?

Lets start with the definition of the word.  Amortization comes from the English word amortisen which means to kill, from Wikipedia.  Now you understand why you feel like making those mortgage payments every month is killing you!  But the meaning is actually to kill the debt even though it feels like a slow death.

The mathematical model of amortization is a calculus function that looks like this:

A=P (1 + i)n / (1+i)n = P*i / 1-(1 + i) - n

Where:

• A = periodic payment amount
• P = amount of principal, net of initial payments, meaning "subtract any down-payments"
• i = periodic interest rate
• n = total number of payments

After all that tedious math what we really care about is how does it affect me?

After you have spent hours looking for your dream house with your favorite Realtor, written the contract, joyously celebrated getting it after beating our those other 3 buyers that wanted it and now you are at the closing table where it will become yours..and the banks.  You are presented with the Truth in Lending Disclosure that tells you that with that $200,000 loan on your $240,000 dream house (20% down payment, 80% financed), that you will pay the bank $231,677 in interest or 116% of the loan at 6% interest to your mortgage company after 30 years.  Now weve all looked at this on our closing statements, even though we do our best to overlook those incredibly scary figures telling ourselves that we can afford the monthly payment so its really not a slow death after all! 

Lets look at the cold hard facts of amortization;

The first monthly payment breaks down like this:

Total payment is $1199.10

Principle is $199.10

and interest is $1000.

If you do the math $1000 / $1199.10, the result is 83.395%, or at the beginning of the mortgage you are paying over 83% in interest!  Only at the end of the term or if it is paid off do you realize that the 6% that you were so happy to get is really 83%  

As intelligent adults most of us never sat down and did the math to figure out the real cost.  I believe that most of us never did the math is because we knew that in order to have a home to call our own we had to incur the debt, (unless our name is Gates).  The mortgage companies, while they have served their function and enabled us to own a home of our own, have their sleight of hand magic act to distract us from the real amount of interest we are paying.  While we are watching the never ending ads on TV about how mortgage companies compete and you win so you get the best interest rate; they are laughing all the way to their bank while they rack up 83% interest!  And in order to give you that fantastic rate they will only charge you several thousands of dollars of closing costs to do it!  There is a reason the tallest most expensive building on the block is the bank!

Another fact that most people do not realize is that the halfway mark when your payment is interest to principle is 21 years not 15!

So now we know the price tag!
There is a reason the tallest most expensive building on the block is the bank!

The shortest and simplest answer is to pay off your mortgage debt in the fastest way possible and save 83%!  Keep reading for some strategies to do that.