Amortization Schedule - 30 Year Mortgage

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Amortization Schedule - 30 Year Mortgage

Chauncy Gray
Richmond, RI · Member since 2019 · 124 posts · 40 votes

Hello Everyone,

I was at a local real estate investor group meeting last night, and I was told something that I could not believe at first. I was told that amortizations are never good, especially for 30-year mortgages. The presenter told us that we are being told by the bank that we are paying, for example, a "5%" (or any "low") fixed interest rate on a 30-year mortgage, but what the bank is not telling us is how much we are actually paying altogether. The presenter continued and said that those who are on 30-year mortgages are paying 60%-100% interest (or 160% - 200% of the loan value), not the traditional "5%" that we are applying for. I just could not believe it, until tonight, where I built an amortization schedule and I ran a scenario. 

I created an amortization schedule for a $484,000 loan on a 5% interest rate. Upon completing the schedule, I took the total amount of the simple interest for all 360 periods and the principal for all 360 periods. I totaled each separately, and then I added them together. 

Simple Interest - $451,358

Principal - $484,000

Simple Interest + Principal = $935,358

If I did this correctly, the borrower is paying back nearly double of what he or she borrowed (over 193%) at the last period. I find this ratio to be the same for any 30-year mortgage, and I also found the ratio to be smaller for loans with shorter terms. 

With the way the amortization schedule is structured, 5% is being applied, but it's the interest that's deducted first before the principle, as with any other schedule. The simple interest and principal still add to the monthly payment, but the banks are making more money (a lot more I guess) by deducting the interest first. I don't find the banks to be lying, but I rather find them to be a bit cunning...

Am I missing anything here? I added the link to the spreadsheet that I generated, if anyone wants to review it:

https://docs.google.com/spread...

Why should real estate investors take out 30-year mortgages if the investor has to pay back nearly double to the bank, even if the investor makes profit off of the property?

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Frank Patalano
Rental Property Investor · East Providence, RI · Member since 2018 · 1k+ posts · 1k+ votes
7y

You are paying interest based on your current balance. This is no secret. The banks are not trying to trick you. They often give you an amortization schedule at closing. If you pay down extra, then next month the payment stays the same but more money goes to principal, which pays off your mortgage faster.

2 things that you might be missing are the time value of money and inflation.

Time Value- Being able to use $1 now is more valuable to you than waiting 30 years from now to get it.

Inflation- Money will typically be worth less in the future. Basically a future $1 bill is going to be worth less than a present $1 bill. Future pay down will actually cost less than paying it down now.

I have no problem with the current system. I have over a dozen mortgages. Each of my properties is making a profit which can help me take care of the payments.

I am able to use leverage to buy more properties, which is giving me more profit, which in turn allows me to buy more properties, if I see fit.

It is even more amazing for someone doing a house hack. You get to collect 100% of the income even though you may have only put down 3.5% of the purchase price. (Maybe the bank should get a portion of the rents? jk)

What type of Real Estate meeting was this? I have been to hundreds over the years and most people want the longest amortization schedule possible. Were they trying to sell you something?

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  • Paul DefnginPro Member
    Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
    7y

    @Frank Patalano or a HELOC designed to serve as your checking account 😀, but comes with a hefty setup fee of $3,500 upfront or more.

    2Reply
  • Frank Patalano
    Rental Property Investor · East Providence, RI · Member since 2018 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Paul Defngin:

    @Frank Patalano or a HELOC designed to serve as your checking account 😀, but comes with a hefty setup fee of $3,500 upfront or more.

     Oh yeah. I forgot about those as well. About 5 years ago I was getting a ton of people contacting me to do that. Thanks for the reminder.

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

     @Wayne Brooks

    Hello, Wayne. When calculating the present value factor (1/(1+i)^n), I have to take the inverse of (1+i) and raise it to the total number of investment periods. Basically, I am factoring in the upcoming/unpaid monthly payments, and I am discounting them all to the present value before finding out what the monthly payment should be.

    V/R,

    Chauncy

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    Hi @Account Closed,

    Thank-you for expounding on that, I appreciate it very much! 

    Very Respectfully,

    Chauncy

    1Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Carlos Tavares

    Thank-you very much, sir. I am considering house-hacking, so I am now looking at ways as to how to structure it. 

    V/R,

    Chauncy

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Jacob Rzewnicki

    I explain the details three posts above, let me know if you don't understand it.

    V/R,

    Chauncy

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Jim D., thank-you for sharing.

    @Tony Kim, thank-you as well for sharing. 

    @Irina Belkofer- Yes, I was thinking the other way around, when I really should be looking at as to how much I will be making off the asset, how my returns will be. It is especially fundamental. Thank-you.

    @Mark Welp- I will keep this in mind, thank-you. 

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Michael Ealy,

    I appreciate you sharing this, and it reinforces the basics of what real estate investing is all about. 

    Very Respectfully,

    Chauncy

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Kenneth Garrett, thank-you for sharing. 

    Very Respectfully,

    Chauncy

    0Reply
  • Heather Schmidtknecht
    Rental Property Investor · Winona, MN · Member since 2018 · 87 posts · 90 votes
    7y

    @Chauncy Gray, every good faith estimate I have signed has the TOTAL AMOUNT paid at end of the loan term, in addition to the monthly payment, etc. so even if I was not educated about this, if I am reading documents before I sign them, it’s there in plain sight (not fine print) —- at least at my bank in Minnesota.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Chauncy Gray:

    Hello,

    @Joe Villeneuve 

    I took the time to analyze the statement/claim because what I cared about was knowing exactly how the numbers prove the statement to be either true or false. I care because I want to know exactly as to how all of the numbers will play out before I make a decision. I love doing my own research. I seek to understand everything in terms of numbers, and I want to see how I can structure things. 

    You do realize there are apps that all you need to do is fill in the principle, interest rate and term, and it will spit out the full amortization schedule for you?

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    Yes, I do understand such tools are out there. 

    0Reply
  • Thomas J Allen
    Detroit, MI · Member since 2019 · 15 posts · 7 votes
    7y

    @Chauncy Gray I've always wondered about this too. I am brand new to investing, so I have been reading a lot and many people think that it is best to put the smallest down payment as possible, so the tenant can pay everything off for you. They say it doesn't cost them anything and it allows them to purchase more properties. Although understand that view, it actually does cost them something. Opportunity cost, right? The faster properties are paid off, it lowers the total amount of interest, right? That means the amount that could be paid towards interest, would then be put into the owners pocket, right? Tell me where I am wrong, as I'm trying to increase my knowledge and learn from those with more experience.

    1Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Thomas J Allen

    Hello Thomas,

    Yes, it is true that once you acquire rental property using a loan, the tenants will be essentially be paying off the mortgage through their monthly rent. Of course, everything was analyzed prior to making the deal, meaning that the investor already knew what the numbers were (minimum mortgage payments, cashflow from each unit per month, cash-on-cash ROI at or above a certain percentage,etc) prior to making the offer. With the profits that the investor makes from the deal, he or she can (and usually does) puts it towards another deal.

    In terms of opportunity cost, you are correct. My analysis involved looking at what the total simple interest was for a 30-year mortgage with the principal of $484,000 and interest rate of 5%. The simple interest by itself came out as $451,358. Adding that to the principal that's paid off at month #360, which is the $484,000, the total amount paid comes out to $935,358. That's just about double the loan, 193% of the principal. 

    Last night, I was thinking to myself: "Why wouldn't an investor take the $451,338 that he/she would have to pay off interest on a 30-year mortgage and put it towards buying property outright?" Of course, the investor does not have that much, otherwise, the rental property would have basically been purchased outright with cash. In terms of viewing the opportunity cost of the $451,338 not used on another property and being used to pay simple interest, you are on the right track. My original perspective was that I was seeing it as no need for an investor to ever have to do this.

    We know it's very common for investors to do the 30-year mortgages on a property because it works. Investors are looking at how much return they will receive from the investment, and that's the main focus of the potential deal, never worrying about the mortgage payments because the payments were already factored into their analysis. 

    There is always the option of paying off more, and the early payments go towards the principal. The bank structures it so that the interest is taken first before the principal, allowing them to make more money. In the long run though, the amortization schedule is cut drastically with early payments, and yes, less interest is to be paid off. Money is saved by paying more earlier, you are correct Thomas. 

    1Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    Yes, you can pay extra to reduce the length of your mtg and pay less interest over all, but realize.....your Yield on the extra money you pay in is Exactly whatever the interest rate is on the loan. 

    1Reply
  • Alvin Sylvain
    Los Angeles · Member since 2018 · 466 posts · 471 votes
    7y
    Originally posted by @Judy Murphy:

    I believe it was Einstein that said compounding interest is the eighth wonder of the world.  Learning how to mitigate this would be very beneficial to the mortgagor...  For example, paying one extra payment per year will reduce a 30 year mortgage to roughly 22 years...  Paying $500 extra on loan amount of $85k loan will reduce the number of years to 9 from 30.  I would rather get all the money the tenants are paying to the bank, so if I have some extra cash I will drop some on the principal.  If not, let the renters pay it!

    The best and easiest strategy I've heard about is the Bi-Weekly payment plan. Basically, you pay half of your monthly payment every 2 weeks. Understand, there are 12 months in the year, but 26 bi-weeks, or the equivalent of 13 "monthly" payments. This extra "month" helps pay down the loan more quickly (I don't have the math handy), but the "payment pain" is about the same as a true monthly payment.

    2Reply
  • Jeff Ronningen
    Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes
    7y

    @Chauncy Gray. Basic finance principles should be taught in high school. Financial illiteracy is a huge problem. The sum total of payments for a 30 year mortgage only requires multiplying the monthly payment by 360. This should not be a surprise. After 5 years of payments the principle is only paid down about 8%.

    1Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Alvin Sylvain, I see what you are saying. 

    0Reply
  • Michael Kieffer
    Lender · Miami, FL · Member since 2016 · 10 posts · 12 votes
    7y
    @Chauncy Gray The average home buyer is concerned with month to month cash flow and uses a 30yr mortgage because of the lower payment (at the expense of a larger total interest payment). A 15yr payment is a smarter financial decision, but you need to have the ability to carry a higher mortgage expense. The optimal thing to do is use a 30yr mortgage but treat it like a 15yr. This will allow you to reduce interest expense but you still have the "option" of a lower payment if you are tight for the month.
    4Reply
  • Jim BlackburnBusiness Member
    Lender · Florida Based (48 states Puerto Rico) · Member since 2017 · 321 posts · 121 votes
    7y

    @Chauncy Gray

    There is no secret or stealing. This is how finance works my man… Check out the game Rich dad poor dad 2. I bet that 20 years from now, after you’ve built your real estate empire, using all of the knowledge that you learned on BiggerPockets, and Rich dad Poor dad, that you too will be lending people money, and charging interest over a 30 year amortization.

    Why? Because thats what people with capital do. It’s called “capitalism.” Those who have the capital, can lend to others, to help them buy houses and build businesses.

    Here’s the thing that you must realize… This isn’t free money…The lender takes on a certain degree of risk in exchange for the possibility of a return on their investment..

    Pretend you’re the lender… You lend a young man $200,000 cash to buy ahouse… In exchange, he has to pay you $1000 a month… (not a bad deal for the young man, considering the fact that without this loan he wouldn’t have the money to buy the house… For just $1000 a month, the seller handover the keys to a house… that’s A huge opportunity… That many countries in the world don’t get to enjoy this luxury of finance!)

    So what’s the risk? Six months into the loan, the young man stops paying you your thousand dollars a month… (remember you are the lender). In some states, it can take two or three years before the lender/landlord can finally kick the person out of the house with the sheriff sale. At 36 missed payments and $1000 each… That means the bank lost $36,000 on taking a chance with that young buyer.. and that’s just the loan payments. I imagine the buyer was not paying the property taxes either. Property taxes are probably $15,000 for three years.. On top of that, since the buyer hit rough times, lost his job, and was short for cash… He decided to rip out all the cabinetry and appliances and toilet and sink and sell them on craigslist for a few thousand dollars.. let’s say approximately $20,000 of labor and materials to get the property in livable condition. I’m top of that let’s add another $5000 for court costs to serve into effect into foreclose.

    Altogether the lender lost $76,000, by taking a risk, to offer this young Buyer $200,000 loan...

    So the point is, there needs to be some element of reward in exchange for risk…

    And again, the beauty of capitalism, which is the beauty of America, is that you can play both sides…. It’s just that when you’re young, and without money and education, it takes a few years of experience under your belt before you accumulated knowledge experience and capital..

    Invest time on this website every day, invest time in your social networks, and invest time and bettering your skills every single day.... and you too will be in the position one day to be the lender.

    954-993-1625
    Stairway Mortgage, a Division of NEXA Mortgage LLC598 Reviews
    WebsiteView Page
    4Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Michael Kieffer, thank-you for sharing. 

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    7y

    @Jim Blackburn

    Whew, I hope that wasn't a true story. 

    I am taking in a lot each day from Bigger Pockets, and getting together with real estate investors. Thank-you for the advice, I will continue doing my best. 

    0Reply
  • Cole Raiford
    Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes
    7y

    @Chauncy Gray yes, that’s how it works. You aren’t being swindled.

    1Reply
  • CJ Wallace
    Real Estate Agent · Sierra Vista, AZ · Member since 2016 · 23 posts · 6 votes
    7y

    @Chauncy Gray it was Renatus wasn't it? .... I am a part of that group as well. Isn't that crazy?

    0Reply
  • Zachary Paschke
    Scranton, PA · Member since 2017 · 168 posts · 137 votes
    7y
    Originally posted by @Mark Welp:

    @Chauncy Gray

    Having high cash value life insurance to store your liquidity is a great thing.  I have lots of it to store my cash and yes I could borrow against it to buy real estate, and sometimes I do for a quick cash offer.  But then I always turn around and go to my bank to get a 30 year loan.  I do not want my own "liquidity" stuck inside the walls of a house.  I want to get my money back, store it in my insurance policy, and then wait for the next opportunity to go buy another house.

    Mark, you’re right. It’s important to make sure the policy is properly structured as well. I currently sell a whole life policy that has  a 4% guaranteed interest rate and a non-guaranteed dividend that has historically paid 5-6%. They charge 5% for a loan. That’s the only ‘fee’ for your loan. The key is the dividend is non-direct recognition. Meaning the divided continues growing the same with or without the loan. 

    What bank would continue paying you interest on money you have locked up into a deal?  So for anyone looking to do this, pay the policy up (as much as possible) in the first few years and get a policy with non-direct recognition loans. Know your interest rates. They vary company to company. 

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