Do you know how much money you pay the bank to borrow money for your home?
You probably understand that you pay interest on the money that you borrowed (however much your home cost). But how much will you pay the bank, just in interest, at the end of your 30-year fixed-rate loan?
At the end of 30 years, you will pay, just in interest, about the same amount of money that your home cost.
For example, you borrowed $150,000 to pay for your home. You will also pay, just in interest, about $150,000. So when you’re done paying your mortgage, you’ll pay the bank a total of $300,000. That’s kind of like paying for two homes….but you only get one.
Crazy right? It doesn’t seem fair but that’s what you’re set up to do. Keep reading because it doesn’t have to be this way. Do YOU know how much interest you’re going to pay at the end of your 30-year fixed-rate mortgage?
calculate your total interest payment
Go to this Amortization Schedule Calculator and see what your number is.
If you need help remembering your interest rate. Go to any of your mortgage statements and the interest rate should be on there. Here’s an example of where the interest rate is on a Wells Fargo statement:
If you haven’t already, click on the Amortization Schedule Calculator link above. Enter how much money you borrowed in the “Mortgage amount” section and your interest rate in the “Interest rate per year” section. Lastly, click on the blue button, “CALCULATE”.
If you have a 15-year fixed-rate mortgage, change the 30 to 15.
What is your Total Interest Paid (orange section above) number? Your total interest paid number is probably very close to your total principal paid number (principal is how much you borrowed to pay for your home).
Did you understand you were going to pay so much money in interest? Most of us don’t. I didn’t understand that when I got my mortgage. I can see why the bank wouldn’t clearly outline this number for us.
we must learn
The numbers you see above are mine. I borrowed $163,625 to pay for my apartment. If I stick to my current payment plan, I will pay $130,479 in just interest. So at the end of 30 years, I will pay the bank a total of $294,104.
When I got my mortgage. I had no idea how it worked, I just knew I was borrowing money from the bank and had to pay it back. When I was asked by my mortgage broker if I was going to get a 30-year loan, I said yes. I figured if I had a 15-year mortgage the payment would be a lot higher and I couldn’t afford it. I never bothered to ask how much more my monthly payment would be.
Because now I understand how much interest we really pay with a 30-year fixed-rate mortgage, I would definitely have asked more about a 15-year loan. If you don’t have a mortgage yet, I hope you are learning what type of questions to ask.
If you’re at a point in your life where refinancing is not an option. Don’t worry, you have the option to pay it off in less than 30 years AND reduce your total interest paid (remember how much yours was?) without refinancing!
I learned the best-kept secret from Tony Robbin’s book, Master the Money Game. He quotes Marc Eisenson who wrote the book, The Bankers Secret. You can get his book here.
What’s that secret?
That you and I diligently make our monthly mortgage payments on time AND have absolutely no idea how much total interest we pay at the end of our 30-year fixed-rate mortgage.
You just learned how much money you really pay at the end of your 30-year fixed-rate mortgage and I bet you didn’t know that number when you were signing your closing documents right? I didn’t.
Like I said earlier, I’m sure the bank doesn’t clearly show you how much total interest you pay at end of your mortgage. So that’s where the title, “The Banker’s Secret” comes from. I would say that’s very fitting.
how to reduce total interest paid
By now, you clearly understand how much interest you would have to pay if you were to stick to your current payment plan. Your 30-year payment plan.
The great news is, you don’t have to.
You don’t have to pay the bank hundreds of thousands of dollars to borrow money for your home. You can reduce your total interest paid without refinancing or having to call the bank for help.
So what do you do? Here’s what:
- You pay your principal payment a month ahead and are consistent about it.
Did you think it was going to be that simple?
When your next payment is due, all you have to do is make an additional payment that will go towards your principal. The amount is next month’s principal statement balance. The great news? Your principal payment is a lot lower than your interest payment. That means that your monthly payment won’t be a lot higher.
For example, below is a screenshot of my latest mortgage payment. My statement balance is $1,204.01, I made an additional principal payment of $246.75 (next month’s principal balance).
This one simple and easy tip will save you thousands and thousands of dollars.
Instead of paying your mortgage in 30 years, you can pay it off in 15 years. And remember, you don’t have to refinance to a 15-year mortgage.
Don’t forget to be consistent. If you consistently pay your principal payment a month ahead, you can pay off your mortgage in 15 years instead of 30 years. And, pay A LOT less in interest.
what this means for you
It means that you will save a lot of money. Thousands and thousands of dollars.
What exactly is happening by paying your principal payment a month ahead?
Paying your principal payment a month ahead will reduce your principal balance a lot quicker. What does reducing your principal balance do? It reduces how much interest you pay because your interest payment is calculated based on your principal balance. Here’s an example:
|Principal Balance||Interest Rate||Monthly Interest Payment|
Do you see how the Monthly Interest Payment goes down as you reduce your principal balance?
By doing this, you are not paying more than you have to. You are simply getting ahead on the money you have to pay back anyway, your principal balance.
- Understand your total interest paid amount. Use the Amortization Schedule Calculator. How much would you pay just in interest if you were to continue the 30-year payment plan? You have to be 100% clear on this because if you don’t understand it won’t be real to you. You won’t understand how much money you REALLY pay the bank to borrow money for your home.
- Pay your principal payment a month ahead and be consistent with it. Paying next month’s principal balance won’t increase your total payment by a lot. So commit to doing it! And remember to be consistent because that’s what’s going to help pay off your mortgage in 15 years instead of 30 years. Also, it will save you thousands and thousands of dollars!
I hope you learned something valuable and are excited about paying your mortgage a lot sooner than you ever thought possible.