Let’s look at what happens if Shawn were to make a prepayment earlier. In this scenario, Shawn pays an extra $10,000 towards his mortgage in December of year 2.
By paying $10,000 in year 2 of this mortgage, a lot of things happen:
- Shawn saves $45,886 in interest liability.
- Shawn adds $10,000 to his equity in his home. That payment goes directly to Shawn.
- Shawn also saves 2.92 years of mortgage payments.
- Notice how the entire graph shifts left.
- Shawn still has a payment next month. It is the same payment amount. And this is important to understand. Shawn still has a payment, but look at how much he saves in the end.
- The end of the graph shifts 2.92 years to the left.
- The yellow “principle payment” line shifts to the left. So, the next month’s principle payment amount is greater than it would have been before the prepayment.
- The blue “interest payment” line shifts to the left. So, the next month’s interest payment is less than it would have been before the prepayment. SHAWN IS SAVING INTEREST.
Now let’s see what happens to Shawn’s investment if he waits to make that extra $10,000 prepayment.