hey David I know you got a bank of David going on you're big time lender I'm trying to buy a $500,000 house I've saved up really well I got the $100,000 down I need a $400,000 loan from the bank of David what can you do for me how about this I'll let you borrow $400,000 at 7.125% and in 30 years you can pay me back $997,500 I'm boring 400 Grand that's it David you want me to pay back almost a million dollar yeah that's exactly right but you know what that's what you've been doing on every single house that you were buying anyways you didn't know that I I guess not well you're talking to the banker David and unfortunately every other bank is going to be the same thing if that shocks you well you're in for more surprises in today's episode of mortgage Monday where Christian and I get into how much you're actually paying the bank back when you borrow money and more importantly what you can do to pay them back less so you build your wealth faster and have more money to buy more real estate that and more in today's episode of mortgage Mondays Christian bacheler let's talk amortization periods 15year loans 30-year loans and everything in between how are you today I'm doing good good episode just for everybody to kind of remember the fundamentals of of mortgages how to decide what product's best for you but before we get into that remember when you had to pay to get a lead's phone number it was like the Dark Ages until deal machine made skip tracing a thing of the past now with your deal machine plan you get unlimited access to phone numbers and contact information for no extra cost that's right get high quality reliable information trusted by Leading financial institutions all fully compliant with the federal do not call list explore over 150 data points including age gender marital status occupation and so much more trust me this is the data you need for our off-market deals with new filters people flags and color-coded phone numbers lead management just got a whole lot easier ready to step up your investment game sign up for a deal machine plan today and gain immediate access to this unlimited Treasure Trove of contact information and phone numbers just head over to deal machine.com slbp transform your lead generation and deal making strategies with deal machine sign up today and start exploring the unlimited possibilities at dealm machine.com BP like Bigger Pockets now back to mortgage Mondays all right so if you have heard of a 15-year loan a 30-year loan what are they what's the difference obviously the year that you're paying the loans is the difference so your your payment terms of the loan 15E is a payment period scheduled over 15 years 30 years is 30 years right and there are differences with interest rates monthly payments all that even though you're taking out the same loan amount and that's obviously stemming from the fact that you're paying it over either a shorter or a long period of time okay good so people have options where they could pay a loan off over a longer period of time like 30 years or shorter period of time like 15 years there's even 10 years options there's 20e options I believe that there's pretty much every option what would prohibit somebody from choosing like a 17-year option yeah good question and there are there are very very flexible loan options in conventional loans I mean we've done like a 12year loan right a 15E a 177e just like you said David what would prevent people from from choosing those options is that obviously when you're shortening your payment period it means you have to pay more per month even though typically on shorter term loans you get a lower interest rate your gross payment actually increases because you're paying your loan off in such a shorter period of time we'll have a couple examples that we go through comparing you know for example 30 year 20 year and 15 years to show you guys what payment and interest rates would differ so in other words if you wanted a 12year loan you could get one and you could get a better rate but if your DTI didn't support that it wouldn't be an option that's exactly right so a little later in the show we're going to talk about the difference in total interest paid versus a 3020 and 15year Loan just know that the longer you extend the loan out for the more total interest you're going to pay so there's an element of delayed gratification versus immediate gratification if you want that lowest payment possible to ramp up your cash flow it comes to the price you're going to pay much more over the total period of the loan and you're going to have a higher interest rate so let's start with the 30-year loan Christian at today's rates on a primary residence what is a good number people can expect to pay on 30-year fixed rate all right guys so right now obviously recording this in March 2024 just plugged in a sample 7 and an eth which is 7.125% interest rate on a 30-year loan so this is a 30-year payment period your total monthly payment would be $26.94 that's pre- taxes and insurance that's just your loan payment and what that would lead to if you just paid the minimum for the full 30 years you never refi you never sold you held that loan to maturity you would have paid out a total interest of $570,500 on your 5 $500,000 purchase so you actually end up paying more in interest than you did to buy the house and that's the cost of financing over a long period of time it's a crazy thought people bulk at the thought of paying $500,000 for a house they think that's too expensive but then they end up paying $570,000 in interest over that 30-year period of time and that's at a 7.125% rate now for the exact same loan but over a shorter period of time so now you're going to pay it back over 20 years what interest rate can somebody get today you'd be a little lower so we we pric out at a 6.875 this would be on a 20-year loan like you said David and guys just listen to this shocking difference in interest just shaving off those last 10 years instead of that 570,000 in interest you'd pay over the life of the loan in the 20-year option you would pay $337,000 one in interest over 20 years so shaving almost $250,000 off your interest paid that's half of the house price all right so in order to save $250,000 over the life of the loan here's something that's even more shocking the difference in your month payment is not as drastic as you think the 30-year loan at 7.125% was priced out at just under 2700 the 20-year loan at 6.875 is priced out at under 3,100 it's only 3,70 so we're talking about $370 a month more to save a massive amount of money over the life of the loan that's almost what a,1 savings 370 a month to save 337,000 over the life of the loan right that's that's pretty good right so absolutely when you guys are pricing out these mortgages is make sure you're not just putting yourself in the box of always 30e loans always 30-y year loans right that is the standard in America probably 90% plus of all of our loans or 30-year fix rate loans but there are other options guys and one thing to think about why people go for the longest loan possible is maybe they didn't know about it they don't listen to mortgage Mondays they didn't know it was an option to get a different amortization period but a lot of them are also trying to maximize cash flow and why are we trying to maximize cash flow because we're trying to get out of our job as fast as we can and sometimes it looks like you rushed out like the hair in the story of The Tortoise and the hair and you got as much cash flow as you could so you could try to quit your job but then the tortoise B check because you ended up paying so much more interest over the life of that loan now the last option we're going to look into is a 15-year loan if somebody wants a 15-year loan under the same conditions what can they expect for an interest rate compared to the 30-year yeah this is where you see some some pretty big drops here 15year loan the going rate today would be 6.375 which is just about a 1% savings over the 30-year equivalent where we started at 7.125 your monthly payment here would be $ 3457 so if we're comparing it at our starting point of 2700 a month it's about a $750 increase on your monthly payment so that's pretty substantial not everybody would be able to accomplish that right but in the event you could and you held this loan for 15 years your total interest paid would be 222,50 so that is significantly more than half of the interest shaved off from where we started at 570,000 on the 30-year equivalent really really good savings now that we're seeing where you're shaving off 60% of what that interest is that you'd pay over the course of the loan that's about right if you go for the 15-year option with the lower interest rate you're basically combining the lower rate with the shorter period of time that you pay it back you end up paying right around 40% as much interest as if you went for the 30-year loan that had the higher rate now let's sum some of this up 30-year loan 7.125 was the rate about 2700 was the payment and your total interest was $570,000 on a $500,000 house that you put 20% down okay so you borrowed 400,000 to pay back 570,000 that means you borrowed 400 and your ultimate number you had to pay back to the bank was 97,1 154 so to borrow $400 you're paying back about a million doll over 30 years to get a 7.125% rate the 20-year loan your rate drops from 7.125 to 6.875 nice little drop there your monthly payment only goes up about 370 bucks so you're about 3,70 and the total interest paid was 337,000 and then if you go to the 15-year loan your interest rate would drop from 7.125 on a 30 to 6.375 on a 15 and your monthly payment would be just under 3500 bucks about 3457 so about 3450 and the total interest of $222,000 so as you can see if you can stomach a higher monthly payment you get rewarded with a better interest rate you also get rewarded with considerably less interest that's paid over the life of the loan now let's talk about why that happens it's because of a process that we call amortization so amortization is a fancy word that we use to describe when you pay back principal and interest in the same payment an interest only loan would be a loan where you pay back a set amount of Interest per year for what you borrowed so in this case if you bought a $500,000 house put 20% down you're borrowing $400,000 if your interest rate is 7% you're going to pay back 7% of 400,000 every single year for as long as you have that money borrowed the balance that you owe never actually goes down if it is an amortised loan a portion of that payment it goes towards the principal and a portion goes towards the interest but more of it goes towards the interest than the principal now when the loan period is longer a bigger percentage of every payment goes to the interest which means you lose it and a smaller percentage goes towards the principal which means you get it back you don't owe it when the loan periods are shorter a higher chunk of that payment goes towards the principal and a small small chunk goes towards the interest that's why you save so much when you get a shorter period loan because of the payment you're making every single month a bigger chunk of it is going back to you in the form of principal pay down and we're talking about this because most investors are only taught to analyze for cash flow which means the only number they want to know is what's my monthly payment I just want to get that as low as I can because the lower my payment is the more of the money that I get to keep from my rent but you don't think about the hidden cost and that you're throwing money away in interest every single month there could be some scenarios where if you're in a financially strong position you choose that 15year loan or maybe the 20-year loan and you don't cash flow or you don't cash flow is strong in the beginning but over time you start to pay off really big chunks of your principle and at the end of the day you make way more money than the investor that got the cash flow because they had the lower payment but that meant they paid more interest so Christian what are some ways that people can hack into this amortization understanding to build wealth faster through Equity buildup and loan pay in lending you kind of see behind the scenes a little bit right doing what I do and I've seen people use a whole bunch of strategies to to hack so to speak their amortization you know David you talk about house hacking all the time I'm thinking about how to hack the financing right we're on mortgage Mondays so I think we wouldn't be doing our service if we don't bring this up we talked about the 30 15 20 years those are great options right but all of those assume you're just making your minimum payment so on your 30- year loan you're actually paying it off over 30 years paying the minimum required 20 years same thing 15 years same thing how you can get into these other options is if you paid more than the minimum I have an example scenario that we played out if you took a 30-year loan remember where a 30-year loan started $570,000 in interest you're paying 7.125% interest rate paying it off over 30 years those were where our starting point I did a calculation where if we just agreed to pay what your 15-year loan was so let me make sure everybody's clear we're taking a 30-year loan but we're making the payment of a 15-year loan I ran the numbers and you would actually pay that loan off on year 16 so it's little bit less as competitive right and comparing the interest that you pay on the 15-year option which was 222,000 you would pay a little more you would pay 270,000 however the reason why this is something to bring up in the event like what David brought up 15year loans are hard to cash flow with they're hard to front that expense It's a larger monthly payment if you take a 30-year loan and agree just hold yourself accountable to paying your 15-year loan rate you will still pay it down in a similar time frame on top of that you have the flexibility so if you have a rental property and you had to kick out a tenant or if you have some vacancy or if there's repairs needed or maintenance needed and you're not collecting rent for two three four five months you have the flexibility to return back to your 30-year mortgage payment which is lower by a few hundred bucks and it wouldn't hit you as hard as if you were required and mandated to pay that 15-year mortgage so I call this kind of hey you you can have a 15-year loan even if you're on a 30-year amortization you just have to pay the 15-year loan agreement but having a 30-year still allows you to flexibility to go back and pay your minimum requirement as if you were paying it off for over 30 years that's number one that's hack one hack number two and this is a little bit more commonly spoken about bi-weekly payments an extra payment every year adding on a 100 bucks to your principal any combination of these I'll start with bi-weekly payments typically if you pay once a month which is where mortgages are typically required times that by 12 you you get 12 payments in a year what a lot of people do is they break down their monthly payment typically on the same schedule that they receive their paychecks which most people are by-weekly if you pay half of your mortgage every two weeks there's 52 weeks in the year divided by two is 26 so you actually end up making 26 payments of half the amount which is equivalent to 13 mortgage payments right so you pay 13 mortgages instead of 12 is what it get what I'm getting at and you get that extra pay down of one mortgage payment every year and that typically will lead to you shaving off 5 to seven years from your mortgage so that's the same scenario where you have a 30-year loan but you're making it a 25 to 23e loan pretty cool and you can run the numbers of how much interest that saves and all the same calculations that we're doing but there are absolutely ways to get into your amortization and hack it to be more beneficial to your investing strategy now if you're wondering David I listen to you on the podcast every week why have you never talked about this before well I get it however rates were in the threes why did we need to pay down our loans faster when interest rates are that low it doesn't really make sense to put all the money to towards paying down your loan when you could buy more real estate so we used to be an environment where rates were super low and prices and reds were going up super fast so I was telling everybody you got to buy I'm not saying don't buy but I'm saying you don't have to buy with as much urgency as you did at one point you now know more than the average bear when it comes to loan pay down amortization and the fancy tools that you have at your disposal to make money so you're welcome everybody let us know in the comments was this something that you were aware of and is there something that you think think we're missing do you have a strategy that you use to pay your loans down faster build your Equity quicker and buy more real estate while balancing risk we want to know Christian anything you want to add before we get out of here no I love it what a summary as in typical David Green fashion summing everything up easy to understand I love it as always Bigger Pockets has tons of resources to help you build your wealth through real estate and we would love for you to take advantage of them check out the biggerpockets.com website this is David Green for Christian bashor on mortgage Monday we'll see you next week oh [Music]
