First of all, I can’t wait to be debt-free.  It’s a slow process, but I love having something to work towards.

I frequently point people to checkout an amortization calculator when discussing mortgages and buying homes.  They have shown me how little I knew about personal finance, debt and money in general.  Playing around with loan calculators saved me about $10,000 on student loans.  That little win motivated me to try and be less ignorant about money and do some research.

So, here is a rough (enlightening) example of just how much information can be learned about future decisions from one of these things.

Magically, your total costs equaled exactly $200,000 for a new home.  You have no down payment and your lender isn’t making you get private mortgage insurance because of it (aka, this is not a “real” scenario, only for simplicity sake).

Your only decision is choosing a 15 year or 30 year repayment plan.

30 year

Lets assume 5.2% (from bankrate.com)

$1098.22/mo

Not too bad.

Where are we after 5 years?

Interest paid: $50,863.61

Balance: $183,872.08

Five years & $68k later, we now own about 8% of our $200k home.

15 year

a slightly lower rate: 4.5% (bankrate.com)

Our minimum payment increases to $1530/mo ($432 more than 30 year).

Lets see where we are at after 5 years of paying.

Interest paid: $39,980

Balance: $146,651

The obvious thing, is more money was paid.

$83,329 ($3000/year more).

BUT

$11k less was spent on interest. And now you own 27% of your $200k home, instead of just 7%.

Take a quick peak at the last line of the amortization schedule.

On the 30 year mortgage, you will have paid $395,359.83 for a $200,000 home.

15 year: $275,397.58 for the same $200,000 home.

The end result?  Spending an extra $432/month will save you approx $120,000 by not eating out as much, canceling the movie tier on your cable package and brewing your own coffee. If you end up with a larger surplus than $432, you will end up saving another $5-6k for every additional $100 you add to your monthly mortgage payment.

Disclaimer:  I don’t know anything about personal finance.  I’m just trying to learn.  This entire post is only highlighting certain interesting points in time of the report the amortization schedule shows us.  Don’t mistake this post as advice.  By all means, stimulate the economy, bitch about your debt, overdraft fees and your 11th maxed out credit card.

A few years ago, I was ready to sign over my life for a home with no knowledge beyond “how much do I pay per month”.   I’d be really pissed off knowing what I know now, if I had made that mistake.