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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  • Brandon Ramsay
    Halifax NS · Member since 2019 · 48 posts · 24 votes
    7y

    @Chauncy Gray One of the main reasons to get a 30 yr mortgage is for the lower payment. I know lots of people take the 30 yr for that reason incase the ever get into fincial trouble and not stuck with a high payment that they can't afford, but pay more than the payment when they can to pay it down quicker.

    Everyone does things differently and are comfortable with different things. Just find what you are comfortable with, but plan for worst case scenario and hope for the best.

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

    Thank-you, Brandon!

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

    @Mark S., thank-you for bringing this up!

    V/R,

    Chauncy

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

    @David Dachtera,

    Thank-you! Your explanation is helping me a lot with understanding the strategies that are out there. 

    Very Respectfully,

    Chauncy

    0Reply
  • Tim S.
    Investor · California, CA · Member since 2016 · 367 posts · 375 votes
    7y

    @Chauncy Gray  A book you might really be interested in is, "Invest In Debt", by Jimmy Napier, if you like to play with numbers as it seems you do, that book is really eye opening. Check it out. 

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    Remember when your math teacher said math had real world applications? Well here is one of those times...

    Mortgages are not front end loaded with interest. Interest charged is based on principal owed at the annual percentage rate. 

    The reason you pay so much interest in the early years is because the outstanding principal is larger. 

    The reason you pay so much total interest is because of time. Spreading principal pay back over more years results in more total interest paid.

    When your loan is 5%, that is the annual percentage rate, so amount paid each year. So over 30 years, you are paying 5% each year for 30 years. The principal owed decreases each year, so every year you pay less interest.

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

    @Tim S., thank-you very much!!

    Very Respectfully,

    Chauncy

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

    @Joe Splitrock, thank-you. I have learned a lot of things here along the way. 

    V/R,

    Chauncy

    0Reply
  • Mike Barry
    Plainfield, IL · Member since 2015 · 111 posts · 17 votes
    6y

    Has anyone ever done the math to find the break even point on a 30 year fixed mortgage?

    There has to be someone who pre plans an exit strategy based on refinancing to cash out or Rate & Term based off lower paid off value.

    Assuming traditional conventional loan with 20% Downpayment

    0Reply
  • Chauncy Gray
    OP
    Richmond, RI · Member since 2019 · 124 posts · 40 votes
    6y

    Hello Mike,

    If I understand you correctly, this is about equity vs. loan payoff. At best, I have built an amortization schedule. Where I find the amount paid off and the equity equal, that is where equity will start to increase. 

    Chauncy

    1Reply
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