Discovered neat/easy way to pay off 30 year loans in 20 yrs
I ran these numbers using 30 year fixed loans with rates ranging from 3.5% on the low end to 4.75% on the high end. This is for you buy-and-hold types that are now at the stage of looking at your 'permanent' financing; no point in doing this on hard money you're about to refinance out of, or any other 'temporary' financing that's holding you over until you cash out based on ARV. This will also be, I suspect, more powerful the earlier and younger in your REI career you are.
So, the problem: 30 years is a long freaking time! Furthermore, it's a little harder to be cash flow positive with 15 year fixed financing. In addition, anyone can run the numbers to figure out what constant higher payment you need to make to pay a 30 year loan off in X years, but it's tough to swallow that higher payment early on.
The solution: Gradually ramp up your payments in a way that doesn't hurt because your rent is (ideally) increasing at a rate greater than you're increasing your payments.
It works out that increasing your payment by 3% a year, or 0.25% per month, will pay off 30 year loans with fixed rates ranging from 3.5% to 4.75% in less than 20 years.
Here is what that looks like at the start of a $375k 30 year fixed at 4.5%. This is for a $500k property putting down 25%.
| Payment | Date | Payment Amount | Interest Paid | Principal Paid | Additional Principal Payment | Principal Balance |
| 1 | 6/1/2016 | 1,900.07 | 1,406.25 | 493.82 | 0.00 | 374,506.18 |
| 2 | 7/1/2016 | 1,900.07 | 1,404.40 | 495.67 | 4.75 | 374,005.76 |
| 3 | 8/1/2016 | 1,900.07 | 1,402.52 | 497.55 | 9.51 | 373,498.70 |
| 4 | 9/1/2016 | 1,900.07 | 1,400.62 | 499.45 | 14.29 | 372,984.96 |
| 5 | 10/1/2016 | 1,900.07 | 1,398.69 | 501.38 | 19.07 | 372,464.51 |
| 6 | 11/1/2016 | 1,900.07 | 1,396.74 | 503.33 | 23.87 | 371,937.32 |
| 7 | 12/1/2016 | 1,900.07 | 1,394.76 | 505.30 | 28.68 | 371,403.33 |
| 8 | 1/1/2017 | 1,900.07 | 1,392.76 | 507.31 | 33.50 | 370,862.52 |
And so on. It pays off in month 228, which is 19 years exactly.
| 227 | 4/1/2035 | 1,900.07 | 16.76 | 1,883.31 | 1,440.65 | 1,145.32 |
| 228 | 5/1/2035 | 1,149.61 | 4.29 | 1,145.32 | 0.00 | 0.00 |
You're paying $1440.65 extra per month at that point, which at first seems crazy, but do me a favor and project forward 18 years of rent increases for me and you will see that it's not actually you paying for this.
At the start you are increasing your payment by about $5 per month. Towards the end, you are increasing your payment by about $8 per month. At the end of year one you will be out of pocket $374 additional dollars, so you'd have to plan on increasing rent by some number greater than $31 per month on a $500k property to let the tenant(s) cover the cost of being debt free on this property 10 years sooner. If it's a 3 unit, that means $10 per month per unit, each year (or just go with 3% or greater, per year). I don't think that is crazy at all.
Sure, you can do that. $500 extra per month starting right now for the next 20 years in this scenario will pay it off in less than 20 years. Be my guest. I suspect REI are likely to find that my proposed method of starting small but gradually increasing each month in a way that rent increases more than cover it will be far more manageable.
If you start this at age 30, that means you will start having rental properties become free and clear, and thus REAL cash cows, while still in your 40s!
Thoughts?
