Your home may be one of the most important investments you ever make. It follows that your mortgage is one of the most important debts you will ever pay.
An Adjusted Rate Mortgage could make sense if you plan to sell in the near term before the rates have a chance to adjust upward or perhaps if you have an income that is guaranteed to go up quite a bit, however, most folks are better off staying away from adjusted rate mortgages. The ideas I present apply to adjusted rate as well as fixed rate mortgages, but these examples refer to fixed rate loans.
Fixed Rate Mortgages typically have a term of fifteen or thirty years. Other terms are possible. Regardless of the length of your mortgage, your first payments are mostly interest. The amount of debt you pay off with each payment gets bigger as you get further into the loan. Your last payments are mostly principal.
The interest for any monthly payment is easy to calculate. Take the amount you owe times the interest rate and divide by twelve(twelve months in a year). So if you owe 100,000 at 7%, the interest on your first monthly payment will be $7,000 divided by 12 or $583.33. Any additional amount reduces how much you owe. You can also use an on line mortgage calculator. I like the one at this link because it is really simple and works well.
Here's an amortization schedule from the link above for the first year of that 30 year, $100,000 loan at 7%:
| Payment No | Principal | Interest | Cumulative Principal | Cumulative Interest | Loan Balance |
| 1 | 81.97 | 583.33 | 81.97 | 583.33 | 99918.03 |
| 2 | 82.44 | 582.86 | 164.41 | 1166.19 | 99835.59 |
| 3 | 82.93 | 582.37 | 247.34 | 1748.56 | 99752.66 |
| 4 | 83.41 | 581.89 | 330.75 | 2330.45 | 99669.25 |
| 5 | 83.90 | 581.40 | 414.65 | 2911.85 | 99585.35 |
| 6 | 84.39 | 580.91 | 499.04 | 3492.76 | 99500.96 |
| 7 | 84.88 | 580.42 | 583.92 | 4073.18 | 99416.08 |
| 8 | 85.37 | 579.93 | 669.29 | 4653.11 | 99330.71 |
| 9 | 85.87 | 579.43 | 755.16 | 5232.54 | 99244.84 |
| 10 | 86.37 | 578.93 | 841.53 | 5811.47 | 99158.47 |
| 11 | 86.88 | 578.42 | 928.41 | 6389.89 | 99071.59 |
| 12 | 87.38 | 577.92 | 1015.79 | 6967.81 | 98984.21 |
If you ever want to know how much an extra payment will reduce the time left on your mortgage you can look at it this way. Lets say you have a tax refund so you feel you can make an extra payment on your mortgage which happens to be $100,000 with a scheduled payment of $665.30. How many months will that extra payment shorten your mortgage?
Look at the amortization schedule and start with the principal for the next payment you owe, In this case $81.97 and subtract it from your extra payment and so on. Looking at the cumulative principal column you can see that your extra payment will pay the principal for almost eight months. It would take $1,015.79 to jump ahead by a whole year.
As you get further ahead in your loan, it takes a bigger pre-payment to jump you ahead by a whole year.
Another way to approach it, that I really like, is to make a higher payment each month. Just $75 extra each month would be more than making an extra payment each year. If you are not sure you can swallow the extra monthly expenditure it takes to get a 15 year loan, making the extra large payment gives you the option of backing off on the payment amount if money gets tight.
If making extra payments comes at the expense of carrying a larger credit card balance it's probably not worth it. I would argue you shouldn't carry any credit card balance at all and you should make extra payments on your home mortgage as well.
You might think that sounds ridiculously idealistic. But think of it this way, if you can manage to get ahead of your credit card payments, you can buy the same things and spend a lot less money without credit card fees added in. The money you save could go towards mortgage payments. What would you do if you found yourself without a mortgage? It could happen if you work at it.