Financing for Manufactured Homes
Please welcome Suzanne and Dave! They are kindly sharing their experiences making additional principal payments on their manufactured home mortgage, and you won’t believe how much money they are saving!
What is an Amortization Schedule?
You probably know that, when you borrow money from a bank (or other lending institution; I’ll be using “bank” to refer to all of them), you pay a PRINCIPAL amount that lowers the amount of your original manufactured home loan and an Interest amount that goes to the bank. I like to think of interest as the fee you pay to the bank for the privilege of borrowing the money.
Do you also know that, even though some of your payment goes to the principal and some go to the interest, the bank wants as much interest as soon as possible?
Learn more about Financing for Manufactured Homes
For example, let’s say you borrow $5,000 for two years at 5% interest. The Amortization Schedule (the form that shows your payments over the life of the loan) looks like this (from bankrate.com):
Your monthly payment every month is $219.36. Every month. Why bother even looking at an amortization schedule? This is why: the bank wants as much interest in their pocket near the beginning of the loan.
When you make your first payment, $198.52 goes toward lowering the amount of your original loan. $20.83 goes to the bank for “servicing” your loan. Your remaining loan amount is $4,801.48 (5,000.00 – 198.52 = 4,801.48).
The second payment has a little more going to lowering the amount of your loan. The interest is a little less.
By the time you make your last payment, only 91 cents goes to the bank in interest.
Two-year loan for five grand is not such a big deal. How about $100,000 at 4% interest for 30 years?
The Principal for the first few months is about 30% of the monthly payment.
By October, 2029 (the 153rd of 360 payments), the Principal is finally more than the Interest.
Halfway through the loan (180 payments), the Principal is about 55% of the monthly payment.
Near the end of the loan, the Principal is over 90% of the monthly payment. If you make 360 payments and finally pay off your $100,000 loan, congratulations!
Also, you’ve paid the bank $71,869.51 in interest. Of the $171,869.51 you’ve paid over the past 30 years, 42% of that went directly into the bank’s pocket…on which they earned interest by loaning it to someone else.
How We Turned the Tables on the Bank
This is our personal history, based on our 47 months here, of making additional principal payments.
Four years ago, we borrowed $58,913.00 to buy our house. It was a HUD foreclosure, FHA Loan at 3.625% interest rate.
I downloaded an amortization schedule from the Internet, imported it into Excel, added some additional columns, and we made a plan for making additional principal payments. Depending on what was happening to our household budget, sometimes we made only one additional principal payment, sometimes we made more.
Last fall, we tried to map out when we’d be “flush” and when we wouldn’t be flush. We pay our vehicle insurance four times a year. Not flush those months. We both collect Social Security. Sometimes, we get a deposit every four weeks; sometimes, it’s five weeks. Not flush waiting during that “extra” week.
We decided to try for $2,000 total when are flush and $1,500 total when we’re not.
Every once in a while, we empty a storage unit and stop making that monthly payment. We can add that amount to the flush/not flush amount so that the extra principal doesn’t hurt any more than making the storage rent.
The Breakdown of Making Additional Principal Payments
- Light Yellow: Regular Payments
- Pink: Additional Principal Payments Made by Suzanne
- Blue: Additional Principal Payments Made by Dave
- Dark Yellow: Total Amount Paid to the Bank for the Month
- Non-Highlighted Column: Interest the Bank Will Never Receive
In the screencap above, light yellow denotes regular payments (principal and interest; $542.13 also include property tax and insurance). Pink denotes the additional principal payments Suzanne is making. Blue denotes the additional principal payments Dave is making. Dark yellow denotes the total amount of all checks for that month. Please note the NON-highlighted figures in the “D” column. That is the interest we didn’t pay that month and we aren’t paying, ever!
In September, we made only the regular payment (we had an emergency). October and December were non-flush months ($1,491.58 and $1,541.52 total). November was a flush month ($2,003.31 total).
Had we made 47 months of regular principal and interest payments, we would have paid the bank $8,054.39 in interest and still owed $54,339.90 on the principal!
Because we’ve made 205 principal payments, we’ve skipped 158 interest payments. By skipping those interest payments, we’ve paid only $6,908.53 in interest and owe $33,215.55 on the principal. We’ve already saved $22,471.32 in interest! And, you know from the examples above, “early” interest is always higher than “later” interest.
Our Flush / Not Flush plan has us paying off the house on December 26, 2018 (71 total months). At that time, we will have paid a total of $8,457.06 in interest. That’s $29,353.52 that will never see the bank’s pocket.
You Can Turn the Tables on the Bank, Too!
1. When you borrow (for anything), make sure the bank doesn’t punish you for making additional principal payments. That’s called Prepayment Penalty.
What is a prepayment penalty?