Skip to content
Innovative Strategies

User Stats

15
Posts
10
Votes
Hoan Thai
  • Wholesaler
  • Philadelphia, PA
10
Votes |
15
Posts

Reducing total interest paid to your 30 year mortgage

Hoan Thai
  • Wholesaler
  • Philadelphia, PA
Posted May 14 2016, 19:05

I just got back from day 2 of the Rich Dad seminar taught by Elite Legacy Education. Our instructor Trevor Evans showed us what they call "Double Principal" payments. This is NOT the same as paying two mortgage payments. The premise behind it is that you pay your regular mortgage payment (principal + interest) and you include next month's PRINCIPAL amount. If you pay the principal payment at the beginning of the month you don't get charged with the interest you typically would. If you simply sent in a check and tell them to apply it to principal you will NOT get the same result because you will still be charged the interest in the second month. Your additional payment must match the principal amount of the next month or they won't know what to do with the money. To get that amount you have to create the amortization schedule and skip every other line (diagram below). This is huge if you really understand the concept. The down side is your monthly payment is larger and gets significantly larger as the time goes on because of the flip flop of principal to interest. I found a website who called it modulating payments

Here is their explanation of it 

"At the beginning of the loan we owe the most, thus the interest payment we owe is the highest, so the amount of the monthly payment that goes to principal is the lowest. Indeed, in Month 1, next month's principal payment (Month 2) on a 30 year at 6% on $200,000 is just $200.10.

So we are budgeted for $1,688 (the 15 year amount), but let's consider that we pay only the minimum due plus next month's principal: $1,199 + $200 = $1,399. We're under budget!

Now Month 2 arrives. But we've already paid that month's principal. You can just cross a line through that month—interest and all. We would have owed $999 in interest for that month, but because we paid that month's principal just one month early, that $999 in interest is completely wiped out. Zero. We spent $200 one month early and saved $999. That's a good deal.

It is important to note that the $999 savings is only realized, non-inflation adjusted, over the full scheduled term of the loan (30 years). If we pay off the loan early and exit the game we won't see the entire savings. We may think that if we pay $200 thirty days early, then we save only 1/2% of $200 or $1. That is the case if we repay the entire loan at the end of that month and then call the whole thing "quits." But for each month we do not pay back the entire loan, the savings accrue. By paying the $200 thirty days early, the entire loan payment schedule shifts forward one month—so now we will be paid off in 359 months instead of 360 months, etc., etc. That is why in Tip Number Two we think in terms of our total savings, over an entire life's payment span of 15 to 30 years, regardless of the number of mortgages."

I hope someone finds real benefit with this. I know I found it nifty. I also figured out how to calculate it in excel if anyone is interested.

Loading replies...