$1000 extra mortgage payment saves how much interest?

today I want to talk about how much money could be saved by making a one-time $1,000 extra mortgage payment hey everybody welcome back to drawbridge finance my name is Levi woods and as always I'm not a financial advisor I'm not offering financial advice and I don't work in the financial industry this is my channel it's an opinion channel about money and I've got it because I want to make people make more money today I want to talk about mortgage payments because as you know or may not know if you've been following the channel for a while last September Kareem and I bought a new house in Vancouver and one of the most expensive cities in the world we bought a home which is fantastic for us and we are loving living here I've got my office kind of finally mostly set up and it's been great I've been able to edit nicely on my new office and it's been great to have a little bit of extra space and actually have a yard so that's been fantastic but one of the things that comes along with the new house is a new mortgage and as you guys probably know I'm not a huge fan of like paying down my mortgage very aggressively because I'm an investor I know that I can make a better return on investment then I can paying down a low mortgage rate now mortgage rates are still historically low this new rate that we have is three point six four percent we're locked in for five years and I know that any payment that I make to that mortgage I'm gonna save 3.6 four percent so if I make an extra payment I saved the money on interest and if I choose to take my money that I have that's extra and put it instead into an investment I might be able to make a better return or am I not depending on the year so it's it's a question that I always struggle with and and we know that at the beginning of a mortgage there's a lot of interest to be saved because you actually save the money on the compounded amount so today I want to look at a chart I want to just break down two different characters and say okay well what if what if the characters had a thousand dollars and they put that thousand dollars extra towards their mortgage payment how much interest would it actually save them and and I think the answer is gonna surprise you because it's not it's not set in stone and so let's take a look at the chart I'm doing this on a really low mortgage value and I'm doing it at a little bit higher rate than I action we have the interest rate that I'm going to use today is 4.5% and the mortgage loan is going to be $200,000 and we're looking at a 30-year fixed term in this particular scenario of course a variable rate mortgages change or in Canada the fixed rate terms change or we have to renew every couple years so it does every mortgage is different in different countries so you have to take that into consideration I'm just trying to do a video to demonstrate you know some of the different ways that a mortgage payment works so the very first thing we look at is what the regular monthly payment is going to be and in this case it's gonna be one thousand thirteen dollars you can see month zero the balance of the loan is two hundred thousand dollars and in the first month we're gonna make a payment of $1,000 the interest is going to be $750 and two hundred and sixty three dollars is gonna go to principal that principal amount 263 gets subtracted from the $200,000 balance and you could see the outstanding balance after the first payment is one hundred ninety nine thousand dollars I've highlighted all the cells in red where the principal payment is less than the interest payment in any given month as we scroll down this chart you're gonna see at month sixty we're still making this one thousand dollar monthly payment but six hundred and eighty-four is going to interest and a little bit more is going to principle three hundred and twenty-eight dollars eventually the way a mortgage works is that we will get down at a hundred and seventy six months the the amount of your payment going to the principal is greater than the amount interest the balance therefore is going down at a faster rate so one of the things I often look at in this type of scenario in mortgages especially as we see this very very steep curve of the of the interest being very very high at the beginning and then tapering off as it goes down if we scroll all the way to the bottom of this chart all of the math working out at month 360 we make our final payment through only three dollars goes to interest and over a thousand dollars goes to the principal leaving us a balance to zero now everybody always wants to know how much interest did we pay and how much the total payments were and this is very important the payment total is three hundred and sixty four thousand the interest payment is one hundred and sixty four thousand and the total principal paid down is the two hundred thousand that's what the bank got so they they received the two hundred thousand dollars back that they loaned you they also received 64,000 dollars in interest what we're gonna look at today is what happens if you make a thousand dollar payment and how much does it save you now the first character I want to look at today is Alice she knows this chart is very dramatic curve and if she makes an extra payment early in her mortgage this is gonna save her a huge amount of interest so she works really hard in that first year and she's scrimps and saves and she gets together $1,000 and in month nine she makes an extra payment of $1,000 so she makes her regular payment 1013 she makes an additional payment of $1,000 in that month and you can see that this changes dramatically the the interest that she pays is still the same it's right in that same seven hundred and forty dollar mark but all of a sudden the principal is paid down by an extra thousand dollars this extra payment goes directly towards the balance outstanding this one payment dramatically reduces the amount of interest that she pays if we compare the regular a more chart the very next month the normal payment would be seven hundred and forty dollars going to interest and in her case only seven hundred and thirty seven dollars goes to interest this seems like a very small amount three dollars but imagine this is three dollars a month and that continues to grow each and every month from here till the very end of the mortgage so let's just skip to the chase let's cut down to this and see that one payment how much time and money did it actually save her well it means that her very last payment is not going to be in month 360 it's gonna actually be in month 357 so she shaved a full three months off of it in payments and she's actually reduced her final payment from one thousand to three hundred and fifty two to bring her balance to zero what this means is that the total amount paid that she paid out of pocket was her regular payments three hundred and sixty one thousand one hundred and twelve dollars plus an additional payment of the thousand living leaving her total out-of-pocket three hundred and sixty two thousand one hundred and twelve dollars compared to the regular schedule which would have had her at three hundred and sixty four thousand eight hundred and thirteen dollars this means that that $1,000 extra payment saved her two thousand seven hundred dollars in interest that is amazing and that is the amazing part about the math of having a payment happen and generating income for a very very long time in this case it's generating savings or interest savings granted that is over a you know twenty nine years she made that payment in the very first year so let's do a quick comparison with Bob who wasn't quite as as Swift as Alice he's gonna make that payment that same thousand dollars but he's gonna make it in month three hundred and forty instead of month nine like she did he's been paying the regular payment all along this thousand dollars is also going to increase the amount of principal ladies paying paying down the balance outstanding by a full thousand dollars in the month that he makes that payment the difference is it's not gonna compound save the way that Alice's payment did that she made really early in the term of the mortgage in the end Bob makes a total amount of payments three hundred and sixty four thousand seven hundred and thirty five dollars in in payment he still paid a hundred and sixty four thousand dollars in interest compared to the hundred and sixty four thousand eight hundred and thirteen over here he actually only saved seventy seven dollars in interest because he didn't have very much time for it to compound so although it did save him money paying an extra payment in the end of the mortgage did not help him very much now this is this is really great for people that have mortgages often when you start a mortgage you don't have extra money to be putting towards it you most people overextend themselves and get the biggest house they can and and that's always unfortunate I mean it's nice to be able to live within your means and have money to put towards your mortgage or towards your investments now before I finished this video I would love to just do another little comparison and say well what would happen if Alice had taken that thousand dollars and put it instead towards an investment that paid a 7% return rather than putting it towards the house which she was only going to say four point five percent on so let's just scroll right back up to the top so I'm gonna do a second column for Alice now remember that this is not this is not both in this case I'm just doing this an area of which one or the other so we're gonna compare Alice on the left side making a thousand dollar payment in in month nine or Alice in the right-hand column making an extra thousand dollars towards a in paying equity so she puts the thousand dollars in but she continues to use this mortgage rate or this mortgage payment amortization schedule on the left-hand side so her thousand dollars generates in the very first month five dollars and eighty three cents in dividends that money gets reinvested back into the investment using a drip program which costs her nothing and so the it's a one-time investment one thousand dollars pays her five eighty three the first month five eighty seven the second month so this balance starts to grow at the end of this if we if she held out for the twenty nine years and three months that she had the total at the bottom her one thousand dollar investment at a 7% return compound it would actually be worth six thousand seven hundred and forty seven dollars now this is pretty amazing and again another example of the power of compound interest this is an interest that's been gaining or in this case dividends that have been gaining over a twenty nine year period one thousand dollars is almost Sevenfold so what I wanted to do was say well what do what happened if she wanted to use that money to pay off that market she's been making regular mortgage payments over here and takes that seven thousand four hundred and thirty eight dollars right here and the reason it's green in this column is because that all of a sudden is where this amount is worth more than the amount over here that is outstanding on her mortgage it's in the previous month she still load seventy nine hundred on her mortgage and her investments were worth seventy three hundred but at this point seventy four hundred dollars worth of investments only sixty nine hundred dollars owing on her mortgage so she could theoretically take the money from her investment and pay off the mortgage completely so what I want to do is now compare what would Bob do if he did the same thing so we'll do his thousand dollars so in the first thing I ran we put it in in month three hundred and forty and in this case we're gonna put it into an investment similar investment Alice it's gonna be a thousand dollars in stocks to pay a seven percent dividend and the dividend gets paid monthly so we're gonna have five dollar and eighty three cents in the first month same as Alice got in her first month five dollars and eighty three cents and it's gonna start to compound at the end of his investment because it's only been a year in a bit it's worth one hundred and twenty nine dollars and extra in dividends that he's made the total investment is worth one thousand one hundred and twenty nine dollars theoretically of course because we know that the the principal could dip but generally speaking most dividend plays don't have a lot of recession in their in their stock value the stock values are fairly stable most of the time so we're gonna look at when would he be able to pay off his mortgage relative to his other self where he was making these this $1,000 towards its mortgage and of course we can easily see that again the investment would have won over paying down the mortgage now the only way that this works is because the investment is returning higher than the interest being charged on the mortgage so when these characters are making that choice they always have to say okay well the if the mortgage rate is lower and the amount that I'm gonna make on the investment is higher than whichever one is higher that would be the one that would be the smarter or return the most money if the mortgage rate was really I like 10% and we only expected a 4% return on the investment then obviously paying down the mortgage would be the smarter choice but here we are in 2019 and mortgage rates are relatively low they're at historic lows in fact and it doesn't make a lot of sense now back in the 80s when mortgage rates were ridiculously high that would have been a totally different story you know so we have to look at what is happening right now whether or not these are good choices but I'm gonna give you guys the full comparison here so let's just do a snapshot for comparison we're gonna look at month 353 now that the reason I'm choosing this month is because that is the month that Alice would have been able to theoretically be mortgage free she if she had put the money into the investment rather than to the mortgage then her investment value would increase and she would have more money to be able to pay down this mortgage that she had taken over here let's just look at their net worth at that time so in the total amount of money put in by all in all four scenarios whether Alice chose to put the money into her mortgage whether she chose to put it into her investment whether Bob put it into his mortgage or Bob put it into his investment they all put in the same amount of money three hundred and fifty thousand seven hundred and nineteen dollars now the total interest paid by Alice in this column is a lot less than the interest paid by Bob and it's subsequently more than if she had paid the interest on the regular payment schedule you can see where I'm getting this math you can see the interest is from this column here Bob has paid the same interest in this case but our investment has returned way more in this in these two scenarios they have zero investment and so the total after all of this like the net value which is really ultimately important what is the net value of the combined alone still outstanding and the value of the portfolio at that time Alice is the clear winner and again I the caveat here is that the investment has to be returning more than the mortgage rate it doesn't have to be returning much more just a little bit more but still a little bit more will still be better than any extra mortgage payment so now of course that is not for everybody and even myself included like I know the power of this compounding and I know that I have a I have a big mortgage right now because I live in an expensive city so in my first year I've been making extra mortgage payments now I know the math doesn't work on this but it makes me feel good to pay down those mortgage payments I know that I can make these extra payments now and then I can reduce those payments in a couple of months and after this first year and I can kind of weigh out those options of how much mix of my extra money is going towards my investments and how much is going towards my my home mortgage payment so anyways that's it for today's video I hope that was insightful for you guys I hope you enjoyed if you'd click the like button down below I would really appreciate it remember to subscribe turn on the notifications bell and let's get rich together

Channel: Drawbridge Finance

Views: 222,558

Rating: 4.8919635 out of 5

Keywords: how to pay off your mortgage early, how to pay off mortgage faster, extra mortgage payment, extra mortgage principal payment, mortgage calculator, mortgage free, pay off mortgage or invest, pay off mortgage in 5 years canada, pay off mortgage, mortgage payoff early, invest or pay down mortgage, invest or pay mortgage, vancouver mortgage, canada mortgage, mortgage canada, mortgage canada explained, $1000 investment, mortgage, mortgage payoff, extra mortgage payments

Id: 5wfn-e2-kBg

Length: 15min 5sec (905 seconds)

Published: Thu Apr 18 2019