Property Management Education

How to Pay Off Your Mortgage Faster

IN THIS BLOG:

  • Why paying off the debt on your property is of such great advantage to you.
  • What is compound interest and how can I leverage it to my benefit?
  • How can I pay down my loan faster?

One of the biggest factors of success for our clients has been "paid for real estate." You can use debt to amplify your returns, but income skyrockets longterm when that debt is paid off. When a property is owned free of debt, it can really become profitable. Imagine you purchased a property with a loan from the bank in the amount of $200,000. If the interest rate on your loan was 4.375%, the principle plus Interest (PI)  payment due every month (excluding any expenses like taxes, HOA, insurance or repairs) would be $999 on a 30-year mortgage. 


The amortization schedule chart will break down your payment month-by-month over time (30 years) showing the amount applied toward the principal and interest in each payment. It becomes clear that interest is best viewed as a penalty. If you pay your monthly payment for the next 30 years on the property in this example, you will end up paying $159,485 in interest! The economic principle at work is called 'compound interest'. Not only is compound interest the way banks make their money, but it can also be used by savvy investors to pay off their mortgages faster.


Let’s say you scrimp and save and manage to come up with an extra $1,100 to make an additional payment to your principal in the total of $1,100. In paying this $1,100 down on your principal, you'll leapfrog over payments on the back end of your mortgage. If you were able to pay an extra $100 each month towards the principle of the loan, it would cut 5 years off your mortgage, turning a 30 year mortgage into 25 years and saving you $30,481 in total interest over the lifetime of the loan! This is an example of making your money work for you - compound interest!


It is also wise to consider 'opportunity cost', an economic term that represents the loss of every dollar you spend that could have spent on something else.  For example, if you buy a $10 pizza, the opportunity cost is everything else that you could have purchased for $10. Opportunity cost sometimes changes the perception of how we spend our money. When looking at an amortization schedule, the opportunity cost on your payment is another month of paying because it wasn’t leapfrogged. Many investors have learned that by paying down your principal balance through making principal-only payments in addition to your regular monthly mortgage payment over time, you can significantly cut down on the amount paid in interest over the life of the loan. This reduces the loan term to reach free and clear status on your property faster.

The team at Grace Property Management is here to help! If you have any questions about paying your mortgage off faster, give us a call at 303-255-1990.


QUESTION: I’m a Thornton rental property owner with a 30-year fixed loan. How can I pay the loan down faster to increase my profits?

ANSWERUse an amortization schedule to get a visual of your monthly mortgage payment breakdown and use any income to spare to make additional principal-only payments. Each time you do, you will be skipping over interest and lessening your loan term on the back end. 

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