How to Pay Off A Mortgage Faster (The Math)

hey everybody welcome back to whiteboard finance my name is marco and i'm here to help you master your money and build your wealth i want to thank policy genius for sponsoring this video but more on that later this video is actually going to be about how to pay off your mortgage early or trying to understand how much more money per month towards the principal will reduce the length of your mortgage so if you guys remember my home affordability spreadsheet i created this from scratch so this video is going to essentially take place in three parts so i'm going to show you the home affordability spreadsheet i'm going to show you how an amortization schedule works and i'm also going to show you a very quick and easy tool that shows you exactly how how long it'll take to pay off your mortgage depending on how much more extra you pay per month so just to establish the criteria that we're going to use for this video let's pretend that this couple is going to buy a house that's 400 000 so this is my home affordability spreadsheet if you guys haven't gotten this i'll leave this in the link below it is very useful and it will save you a ton of money if you're in the home buying process so 400 grand and some people in california this will be maybe an outhouse or a trailer maybe somewhere in the midwest this is a nice little 3 000 square foot mcmansion so i'm going to keep it at this 000 number so if their down payment is 20 grand you can excuse me 20 percent you can see that their down payment is going to be 80 percent that's 20 of 400 000 meaning that their mortgage is 320 000. so we're going to use an annual interest rate of three percent over the term of a 30-year fixed rate mortgage so if you notice anywhere that's yellow that means that you are inputting this information so you can see that the taxes let's just call it 7 500 bucks a year some people will pay more some people pay less if you're in new jersey you're probably paying more if you're in uh you know in the middle of a rural area you're probably playing paying less the insurance will just call it a thousand bucks a year and we're gonna say no hoa because these people are smart and they don't want other people dictating their lifestyle so with that being said you can see here that the number of payments per year is 12. the payment per period is 13.49 the sum of payments is four hundred and eighty five thousand six hundred and eighty eight dollars meaning that the interest over the term of this loan being paid at the bare minimum is going to be one hundred and sixty five thousand six hundred and eighty eight so that's what the p these people are paying over the life of this loan is 165 grand so if these people each make 65 000 a piece with no extra income their total gross is 130 their net let's just say is 88 000 if we're taking off 32 percent for taxes social security things like that let's just pretend their monthly net is 7 367. you can adjust all this if you download the spreadsheet you can see that their mortgage to income is 27.9 percent if you include utilities you know an extra 400 bucks a month or so you can see that it's about one third of their income leaving them with about forty nine hundred dollars a month so you're probably wondering okay this is pretty simple marco but how do i understand uh how to pay off my mortgage earlier based on these numbers so if we go into bankrate.com i'll leave this link in the description below this is their amortization calculator so a lot of people understand that you know i'm borrowing x amount of dollars i understand my interest rate i understand i'm going to pay x amount of interest over the life of the loan but they don't understand how mortgages work they don't understand that they're typically front loaded with interest payments first then you're getting to the principal payments later on or a bigger chunk of the principal payments later on so if we continue with this example remember the house the mortgage amount was actually three hundred and twenty thousand dollars remember was four hundred thousand minus eighty thousand down payment the term of the mortgage is thirty years meaning 360 months and then the interest rate that we're going to going to use was three percent from our example before so you can see here that the monthly payments are 13.49 uh the exact same amount that we came up with in our mortgage affordability spreadsheet or home affordability spreadsheet so you can see here that the total interest paid is the same but how does this actually work so if we scroll down you can actually see based on this estimated payoff date the time of this recording is june 21st 2021 if it's a 30-year mortgage let's just pretend like we just started this mortgage right so you can see here that the amount going towards the principal uh meaning the amount that we actually owe is 549 dollars and 13 cents the amount going towards the interest however is 800 a month for this first payment our payment is the same for 360 months it's always going to be 1349 and 13 cents for as long as the loan exists however you can see as time goes on more is going towards the principal and less is going towards interest so the point of this video is to help you understand okay if i get my balance down to a certain amount this will help me understand how to pay off my mortgage earlier depending on how much more i put towards my monthly payment making sure that it goes towards the principal so if we played a little game here let's just pretend like we're 10 years into the future so instead of being in july or june of 2021 let's go to 2031. so if i scroll all the way down to july of 31 that brings us right here you can see that now our principal payment is actually a hundred and twenty nine dollars greater than our interest payment and our balance overall instead of being three hundred and twenty thousand dollars you can see that it's two hundred and forty three thousand two hundred and sixty three so uh i'm going to take you to the next part of this video which will actually help you understand putting how much more towards your monthly principal will actually reduce this amount so just to help you solidify this concept if you keep going all the way down let's go 20 years out okay let's let's pretend like we're in july of 2041. you can see here that now we basically have a thousand dollars going towards the principal every payment we make and only about 350 going towards interest because our balance has decreased and also because the payment is still the same however a much larger chunk is being paid down towards the back end of this 30-year mortgage so if you remember if we go all the way to this first payment here look at the difference 549 dollars and 13 cents as opposed to a thousand dollars towards the principal 20 years later so the next part of this video is going to show you exactly how much to put down per month to reduce the length of the mortgage so you can pay it off early 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and policy genius doesn't add on extra fees the licensed experts at policy genius work for you not the insurance companies so you can trust them to help you navigate every step of the shopping and buying process so head to policygenius.com whiteboard finance to get started now okay so this next calculator that i'm going to show you is a very simple way of instead of playing around with the amortization schedule and trying to figure out what your balance needs to be to get you towards what year i'm going to show you this free tool from bankrate it's the early mortgage payoff calculator and it shows you exactly however much you put towards your principal will reduce the mortgage length by in terms of you know months and years and things like that so let's get right into that so this calculator right here i'll most likely leave this in the description below let's pretend like we're using that same example okay uh however we've been paying on our 400 000 house or 320 000 mortgage for five years so the first question they ask you is years remaining so let's pretend like we're five years in the future so our original mortgage term right here was 30 years okay so that means that for five years in the future we've been paying on this mortgage for five years okay so the original mortgage amount if you remember in our example from our home affordability calculator was 320 000 remember it was 400 grand we put down 20 80 000 and we got 320 grand okay we're using a three percent interest rate so i'm going to slide this down here and this is the key factor right here the additional principal payment remember if we go back to this amortization schedule you have principal payments and you have interest payments this is the money you're paying to the bank for allowing you to borrow that mortgage amount this is the money that you're paying towards your debt okay so if your debt was uh 320 grand on this first payment of 1349 again 549 is going towards the amount you owe 800 is going towards the interest so now let's pretend like uh this couple right here who is originally making 65 grand a piece per year let's just say they decided to you know not go out to eat a couple times a month or let's just pretend like they have a you know a side business making them x amount of dollars per month and they're able to save an additional 150 a month towards the mortgage towards the principal payment well you can see right here on the top of the screen you can see that it says mortgage repayment shortened by three years and six months and it's saving you a total of eighteen thousand five hundred and four dollars over the term of this loan okay over these twenty five years or thirty years whichever way you wanna put it so let's just say that from day one they started making this extra 150 uh per month payment so the years remaining is 30 the original mortgage term is 30. uh the original mortgage amount is 320 the additional payment stays the same at the annual interest rate has not changed it's three percent right so you can see if they started doing this from day one not five years into the future they're paying down this 30-year mortgage four years and six months quicker saving them a total of twenty seven thousand seven hundred dollars now let's just say they decided to go crazy and they bought a house well below their means and they have a big chunk of you know monthly income that they're able to throw at this property let's pretend like these people can add another i don't know 500 bucks a month right well you can see now if they do this for 360 payments it's actually going to be less than that because you're paying down the mortgage quicker but for the first uh payments up until uh 11 years and one month minus 30 they're paying back this mortgage now by basically 11 years in one month saving them 66 000 over the lifetime of this loan so you can see how powerful this is so if i hit calculate you can see exactly the current payment which we have correct which is one thousand three hundred and forty nine dollars the accelerated payments is just this amount plus five hundred bucks which is eighteen hundred and forty nine their schedule payments would have been four hundred and eighty five thousand six 688 which we figured out with the home affordability spreadsheet their accelerated payments have now shaved off that amount that we determined here so you can see the mortgage balances uh coming down and it's going to end a lot quicker it's going to end right here with the additional payments okay so this is pretty interesting and it's pretty powerful a lot of americans especially now in this interest rate environment and especially with baby boomers not selling their houses and demand being increased they're buying houses for more than they can afford and that's why i highly recommend you check out that home affordability spreadsheet it will save you a lot of time heartache stress and money in the future from becoming house poor and buying too much house then you can afford so it's interesting uh the debate is should i pay off my mortgage early if it's a low interest rate especially with a fixed 30-year term which in my opinion is a great hedge against inflation based on the way that monetary policy is going however there's a lot of peace of mind with knowing that you own your home outright except you're locking up all your equity literally in the walls of your house and the only way to get that equity out is a if you sell the property b if you take if you borrow against the property taking out a heloc or you know a second mortgage or whatever you want to call it so but there is peace of mind to having a paid off property so my school of thought is somewhere in the middle but this is for the people that want to know exactly how much more towards per principal per month they're putting down how much that will reduce excuse me reduce the length of their mortgage so as always i hope you got value out of this video thank you for watching the policy genius spot i don't really sell many things on this channel this just helps me pay the bills and the overhead of running this channel thank you so much as always share the video and have a prosperous day bob is a police officer making 65 dollars a year betty is a nurse making 55 grand a year and they just bought a 750 000 no i'm just kidding if you guys want to watch something about that watch the big short that was pandemonium those were ninja loans dude no income no job if you can fog a mirror you're getting a mortgage uh they've gotten a little bit more strict but check out the big short a lot of insight into what happened in o708 don't buy more house than you can afford peace you

Channel: Marko - WhiteBoard Finance

Views: 170,927

Keywords: mortgage payoff, amortization schedule, how to payoff your mortgage quickly, amortization table, mortgage calculator, how to payoff your mortgage faster, how to payoff your mortgage in 5 years, how to payoff your mortgage early, how to payoff your mortgage, how to payoff your 30 year mortgage, how to pay off your mortgage early, pay off your mortgage fast, how to pay off a mortgage faster

Id: 1UAdFi6nQls

Length: 13min 54sec (834 seconds)

Published: Wed Jun 23 2021