Altgage PrePay was born because a mortgage broker told me I could not get a 23yr mortgage. He called it an “odd-term amortization.” I did not know what amortization meant and asked — “why not?” If it isn’t 15 or 30-yrs, it’s odd, but what in the world was amortization? I googled it after hanging up the phone. Amortization is a common accounting technique to deprecate an asset or liability over time. After the customary circumnavigation around Investopedia and Wikipedia, I scrolled past page 5 into the dark web, and then I found the meaning I was looking for
The root of “amortization” is “amort” which means “to kill.”
Who was going to die? Surely, my plans for a debt-free life. The word mortgage means “dead pledge,” i.e., the homebuyer pledges their house to the bank until the loan is repaid.
Mortgages have a fixed payment, pay simple interest, and build equity asymmetrically.
The amortization formula determines a fixed monthly payment. Every interest-bearing loan has to pay interest. Mortgages pay simple interest every month using the formula:Simple Interest = Principal x Rate x Time.So, a $500K loan with an annual interest rate of 6% would pay $2,500 (500 x 6% x 1/12yr) of interest in month 1. Amortizations gradually increase the proportion of principal in every payment, but the distribution is very asymmetric. The lion’s share of early mortgage payments goes to interest.At an interest rate of 6%, it takes 82 months (6.8 yrs) to repay the first 10% of a $500,000 loan but only 16 (1.3 yrs) months to repay the last 10%. That is the fundamental asymmetry of amortization. So, why are loans amortized?
Amortization kills your loan, but it is a slow, expensive, and painful death.
FDR introduced fully amortizing mortgages as part of the Homeowners’ Loan Act of 1933. Before 1933, most home loans were “bullet loans” due after 5yrs. Homeowners could not afford to pay their “bullet loans” that came due during the Great Depression. FDR enabled homeowners to stay put and pay their loans slowly. He kept the American dream alive, but it came at a cost.A homeowner will pay $579,191 in total interest payments on a $500,000 loan at 6%. What worked for homeowners in 1933 does not work 90 years later. Today, homes cost a lot more, and homeowners stay for a lot less. The median home price has more than doubled in the last 20yrs from ~$190,000 to $450,000. Expensive homes mean longer amortization schedules. 90% of homebuyers choose a 30-year fixed-rate mortgage. Lenders have started introducing 40yr terms as well. That’s terrible for building wealth.Modern work-life with frequent job changes and moves is a mismatch for long amortization schedules. Homebuyers typically size up to accommodate a growing family. Every sale incurs a transaction cost of 6–8% and restarts a new loan. The result is mortgage payments that last 50 yrs. Ask 10 million retirees who are still paying a mortgage.So, what’s the solution?
Prepayment accelerates mortgages to save time and money
It’s not feasible to get a 15yr mortgage because the payment is too high. But you can make additional payments to a 30-year mortgage. Three things happen when you pay extra
1. Mortgage balance decrease = equity increase
Home equity is the difference between home price and the mortgage balance. Adding an extra payment decreases the mortgage balance and increases equity. For example, a $25,000 prepayment to principal (green) in month 50 decreases the loan balance (purple) by $25,000 immediately.
2. A cascade of interest savings
Prepayment starts a cascade of savings because mortgages accrue simple interest every month. If the loan balance goes down by $25k in month 50, the simple interest due for month 51 is $125 lower ($25k x 6% x 1/12). Since the minimum monthly payment is fixed, $125 of savings are applied to mortgage principal in the following month. Interest savings in month 52 are $125.625 ($25,125 x 6% x 1/12). This cascading effect continues for a total savings of ~$82,000!
3. A shorter loan in the end
Prepayments reduce the principal balance and “kill” the loan faster than 30yrs. Bi-weekly payments are the most common way to partially prepay a mortgage. Dividing a monthly payment into two equal parts creates a 13th payment each year. That’s because there are 26 x 2-week periods in a year, but only 12 months. It’s a little calendar trickery that aligns with many bi-weekly paychecks. Another common approach is adding a fixed amount to each monthly payment. Paying $200 extra per month would save ~$22k less with ~$12k few prepayments compared to the bi-weekly strategy. What if you could pay less and save more instead?
Altgage PrePay is a new way to pay less and save $100,000 on your mortgage.
Altgage PrePay will save nearly $50k more vs. bi-weekly payments and prepay $15k less. The loan will also end earlier in 23.5 yrs. How’s that possible? Because early prepayments are worth more than later ones, Altgage PrePay makes the bulk prepayments in the first ten years. You’ll build up to 2x more equity and save over $100,000 in mortgage interest. Here’s how it works.
1. Payback mortgage principal in a straight line
With Altgage PrePay, payback is constant. With a typical amortization schedule, you’ll only pay back 16.3% of the principal in the first ten years. With Altgage PrePay, you’ll repay 33.3% or 2x more. Interest rates determine how much you’ll repay with a typical amortization. The extra payments to principal are recalculated every month using your specific interest rate, loan balance, and term.
2. Prepay more upfront and then less over time
Front-loading prepayments helps maintain a fair payback schedule. Prepayments also decrease every month for two reasons. First, the principal component of a fixed payment increases over time. Second, previous prepayments have a compounding effect. Altgage PrePay stops between years 10–12, but the savings cascade continues.
3. Savings continue after you stop prepaying
Front-loading prepayments helps maintain a fair payback schedule. Prepayments also decrease every month for two reasons. First, the principal component of a fixed payment increases over time. Second, previous prepayments have a compounding effect. Altgage PrePay stops between years 10–12, but the savings cascade continues.
1. Guaranteed high-yield savings — while investments carry risk, prepaying your mortgage results in guaranteed savings equal to your interest rate. While putting money in a savings account yields 1–2%, prepaying your mortgage yields ~3x higher savings.
2. Tax-efficient savings — prepayment isn’t just risk-free; it’s also non-taxable. While bond dividends are taxed at 20%, mortgage interest savings are not. The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction and limited state and local taxes to $10,000. In 2022, the standard deduction is $25,900 for married couples, so 85% of Americans can’t itemize. Mortgage interest offers no tax break if you can’t itemize.
3. Sit back, relax, and watch your savings grow — At altgage, we love math and stress-free living. Once you turn on PrePay, sit back and relax. You don’t have to worry about changing the amount each month. We do it all for less than the cost of a cocktail (avg. of $9.1). Funds transfer securely and automatically from your checking account to your mortgage servicer. You’ll get monthly reminders of upcoming prepayments and a savings summary.
Important disclaimer:
Altgage Inc. is a mortgage management company. We are not a loan servicer or mortgage lender. All lending activity is facilitated through broker partners. You can sign up for free and track your mortgage. Homeowners who PrePay are charged a 3% platform fee averaging $8–12 per month for most users. We aspire to provide 30–50x in value for any service fees charged. All fees help operate altgage, expand our services and build new products. Mortgage prepayment results in guaranteed savings that compound risk-free over time.
