As a rental property owner, if you used leverage to buy, your goal is to pay the property off as quickly as possible. When a property is owned free and clear, that’s when it can really become profitable. In this blog, we will give a real-world example of how paying down your principal can help you pay off your mortgage faster and save you thousands in interest.
Imagine you purchased a new property taking a loan from the bank in the amount of $200,000. The interest rate on your loan is 4.375% and your PI payment,
not including any expenses like taxes, HOA, or insurance, is $999 on a 30-year mortgage. Step one is to go online and print out an amortization schedule
chart. Think of this as your roadmap to payoff. The chart will break down your payments over time, showing the amount applied toward the principal
and interest in each payment. It becomes clear that interest is a penalty and you should view it as such. If you pay your monthly payment for the next
30 years on the property in this example, you will end up paying $159,485. That’s a lot of money! The principle in play here is compound interest.
Not only is compound interest the way banks make their money, but it's also the key used by savvy investors to pay their mortgages off faster.
Let’s say you could come up with an extra $1,100 a year. When you go to the bank to make your first monthly payment, you make an additional payment to
your principal in the total of $1,100. In paying just $1,100, you’ve leapfrogged over 5 months of payments by reducing your principal amount. That
means you’ve skipped 5 months of payments on the back end of your loan. Any time you can pay down your principal, you'll leapfrog over payments on
the back end of your mortgage. If you were able to pay $1,100 every year, it would cut 20 years and 2 months off your mortgage, turning a 300year mortgage
into 10 and saving you $113,200 in total interest over the lifetime of the loan! This is an example of making your money work for you.
The next principal to consider is opportunity cost, an economic term that represents the loss of every dollar you spend that could’ve been spent on something
else. For example, if you buy a $10 pizza, the opportunity cost is everything else you could’ve used that $10 on. Opportunity cost sometimes changes
the perception of how we spend our money. When looking at an amortization schedule, the opportunity cost on your principal is another month of paying
because it wasn’t leapfrogged. The lesson to be taken away from this article is that by paying down your principal balance through making principal-only
payments in addition to your regular monthly mortgage payment, you can significantly cut down on the amount paid in interest over the life of the loan
and lessen 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?
ANSWER: Use 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.