In the world of finance, having all expenses accounted for means everything. Hidden expenses are constantly sneaking up behind the investor, businessperson and homeowner and biting him in the backside.
Knowing where every cent goes and having every expense accounted for is one of the keys to gaining wealth. One tool any real estate investor or homeowner can use to find out where his money is going is the monthly payment table, which is also known as an amortization table, schedule or spreadsheet.
What a monthly payment table says
In a month payment table, the mortgage payment is shown as two parts, or separate payments. One part is the principal paid. This amount of money goes directly towards the amount borrowed.
For instance, if a person borrows $ 100,000 and pays $ 1,000 toward principal, he will need to make 99 more principal payments of an equal amount to pay off the mortgage. The other part of the payment the table shows the interest paid on that payment. In the early stages of a mortgage, this amount is usually far higher than the principal part of the payment. When a person pays interest, it is money he has lost.
Interest is time value of money
By looking at a monthly payment table, you can look ahead to the next payment after the one just paid. Here, you can see what the principal and interest parts on the next payment are and pay just the principal part of this payment. By doing so, you'll avoid having to ever pay the interest part, which would have due if you waited until the payment's due date. This is one way where monthly payment tables can be very helpful to anyone who is looking to save, or even make money.
The interest part of the payment shows the time value of money. So, by not using the allotted time to make a payment, the borrower will avoid paying the time value of the amount due on the loan, which is the interest. This is very beneficial because sometimes the interest payments in the first year of a mortgage are 10 times what the principal payments are.
Pay a little, save a lot
Saving the interest part of a payment by paying the 1/10 as big principal part is an example of leverage. This is an important point because leverage is the key to wealth building.
Leverage is used when a property owner uses the rent he has received from a tenant to pay the mortgage on that property. In this case, if the price of the property being rented increases in value, it is the person paying the mortgage, not the person paying the rent who is the benefiary.
Until someone looks at his mortgage payment, or amortization table, he has no idea where the money is going or how he can use the leverage small principal payments give him. It is amazing to see the looks on people's faces when they see their monthly payment table for the first time. People who, in many cases, are very smart and well versed in math are shocked when they see how much money goes toward interest in the early stages of their mortgages.
Knowledge is king
Being familiar with monthly payment tables can help borrowers save thousands, and sometimes even hundreds of thousands of dollars, because they will know how much leverage they will have when they make slightly small principal payments upfront.
For this reason, it is very important any potential borrower has a monthly payment table printed out for him right at the beginning of that mortgage's term. This way, the borrower is awakened to the fact most of the mortgage payments will go towards interest.
They say ignorance is bliss. Because of this so many people, who do not know where their mortgage payment money is going, pay without giving it a second thought. Those to do know however, usually work very hard to make upfront small principal payments and avoid paying larger amounts of money towards interest; which is simply wasted money.