Amortization Schedule - 30 Year Mortgage

OP

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

Hello Frank,

I was trying to express that, from my perspective, that banks may not be cunning in the way that they are lying/trying to trick potential borrowers, but cunning in a way they are not fully educating the borrowers when it comes to understanding the numbers. The banks are not obligated to, but they know that most people who walk to their desks asking for mortgages have not received enough financial education to understand everything that is going on (especially with the numbers). It's easy to think of taking a loan and paying 5% interest is not much at all, but over 30 years, it comes out to be nearly double of the loan value. I am not saying that it's wrong, as every investor has his own or her own strategy, but I am trying to see from another perspective as to why an investor would want to pay more interest on an investment. I could see brand new investors doing this for house hacking, similar to what you mentioned.

I have heard of some investors taking out a 30-year mortgage but structuring it to pay it off in 15 to 18 years, but somehow still calling it a 30-year mortgage. I'm not sure as to what all of the steps are needed to achieve that, but I am aware that not everyone wants to wait the whole term to pay everything off. What I am trying to understand is, what would be the gain of waiting so long? I am only seeing it as more interest that must be paid off in the future. House hacking is how I want to start, but I am trying to weigh everything out.

In terms of the amortization schedule, I performed a manual calculation to find the monthly payments, and I used excel's PMT function to also find the monthly payments. For the manual calculation, I calculated the present value factor and I calculated the present value annuity factor. I divided the present value of the annuity by the present value annuity factor, which gave me the monthly payments. I made sure that my calculations were correct by matching it with the value generated by excel's PMT function.

Essentially, I took the future payments for all months and I discounted them to its present value.

For this schedule, I did not account for inflation. I am not sure as to how I would account for inflation in the schedule.

Regarding the meeting, it was a local real estate and wealth creation training event. The presenter was not trying to sell anything by saying this, but rather he was expressing the frustration of how banks are potentially taking advantage of potential borrowers, who would otherwise not ask for a 30-year mortgage if they were aware that they would owe the bank nearly double in a 30-year span.

Frank Patalano

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

Originally posted by @Chauncy Gray:

Hello Frank,

I was trying to express that, from my perspective, that banks may not be cunning in the way that they are lying/trying to trick potential borrowers, but cunning in a way they are not fully educating the borrowers when it comes to understanding the numbers. The banks are not obligated to, but they know that most people who walk to their desks asking for mortgages have not received enough financial education to understand everything that is going on (especially with the numbers). It's easy to think of taking a loan and paying 5% interest is not much at all, but over 30 years, it comes out to be nearly double of the loan value. I am not saying that it's wrong, as every investor has his own or her own strategy, but I am trying to see from another perspective as to why an investor would want to pay more interest on an investment. I could see brand new investors doing this for house hacking, as you mentioned.

I have heard of some investors taking out a 30-year mortgage but structuring it to pay it off in 15 to 18 years, but somehow still calling it a 30-year mortgage. I'm not sure as to what all of the steps are needed to achieve that, but I am aware that not everyone wants to wait the whole term to pay everything off. What I am trying to understand is, what would be the gain of waiting so long? I am only seeing it as more interest that must be paid off in the future. House hacking is how I want to start, but I am trying to weigh everything out.

In terms of the amortization schedule, I performed a manual calculation to find the monthly payments, and I used excel's PMT function to also find the monthly payments. For the manual calculation, I calculated the present value factor and I calculated the present value annuity factor. I divided the present value of the annuity by the present value annuity factor, which gave me the monthly payments. I made sure that my calculations were correct by matching it with excel's PMT function.

Essentially, I took the future payments for all months and I discounted them to its present value.

For this schedule, I did not account for inflation. I am not sure as to how I would account for inflation in the schedule.

Regarding the meeting, it was a local real estate and wealth creation training event. The presenter was not trying to sell anything by saying this, but rather he was expressing the frustration of how banks are potentially taking advantage of potential borrowers, who would otherwise not ask for a 30-year mortgage if they were aware that they would owe the bank nearly double in a 30-year span.

Was just wondering about the presenter. The last 2 times anyone has mentioned this to me they were trying to sell special family insurance programs where you borrow from your own life insurance policy to invest and then pay yourself back.

OP

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

Thankfully, it wasn't anything like that.

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

There isn't a conspiracy theory, it's just the math... yup, this is how all fixed rate fully amortizing loans work. Car payments, student loans, etc.

14 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Why do you care? You're not paying anything but the down payment.

11 Reply

Dennis M.

Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes

@Joe Villeneuve

Exactly ., the tenant needs to worry about it not you !

4 Reply

Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

@Chauncy Gray

You are correct. The interest is almost double the principle. The tenant is paying your interest through rent while you get to deduct interest, property taxes and take depreciation. The advantage of the 30 year mortgage is its fixed. You can make additional payments to lower the principle, but if you don’t or can’t make the additional payment why not make your payment as small as possible for the best cash flow. It’s the cost of money. That why one of my goals is to become the bank.

5 Reply

Judy Murphy

Investor · Copper Center, Alaska/Indiana · Member since 2018 · 44 posts · 33 votes

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!

8 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

The tenant is paying the mortgage for you. Banks are clear about how much of your payment goes to interest vs the principal, and at the beginning most goes to paying the interest.

The reason to do a 30 year mortgage is to keep the monthly payments lower. I take out mortgages for the longest term possible and then I pay them off more quickly by either increasing monthly payments or making extra payments when I want to. This gives me the flexibility to do what I want.

Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

@Chauncy Gray I just feel bad you did all this work to make that spreadsheet. I use an app that does that in about 20 seconds.

9 Reply

OP

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

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.

6 Reply

OP

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

@Judy Murphy

Hello!

I'm loving those numbers. I have heard about prepaid penalties for other loans, but I was not sure about mortgages. I see that is not the case here. I do see now that taking out a 30-year mortgage and structuring it your way to minimize some of the compounding interest is very beneficial.

OP

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

@Caleb Heimsoth

Hello Caleb, there is nothing to feel bad about.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

@Chauncy Gray There is no compounding interest in a mortgage. Compounding is when interest is charged on already accrued, but unpaid as of yet, interest.

A mtg is a simple interest loan.....each month the interest due is simply the outstanding principal balance times the annual interest rate, divided by 12....simple interest.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

@Chauncy Gray There is no compounding interest in a mortgage. Compounding is when interest is charged on already accrued, but unpaid as of yet, interest.

A mtg is a simple interest loan.....each month the interest due is simply the outstanding principal balance times the annual interest rate, divided by 12....simple interest.

Account Closed

Eastern Michigan · Member since 2018 · 83 posts · 144 votes

On your loan estimate, which is required to be provided 3 days after application, you will see the amount of interest you will have paid after 3 years. It's on the 3rd page, fairly prominent. When you close and get your closing disclosures, page 5 will have the total interest you will haveto pay life of loan. So the banks arent trying to trick anyone, people just don't pay attention

6 Reply

Mark Braun

Rental Property Investor · Monterey, CA · Member since 2014 · 23 posts · 11 votes

@Caleb Heimsoth education for effective action! True all this can be done on a computer. However, Look how much his eyes and mind were opened by taking the time to truly see how this worked out step by step. Now he can use spreadsheets in the future to see how much his TENANTS will be paying in interest vs Prin. Good point Caleb.

Carlos Tavares

Real Estate Professional · Pawtucket, RI · Member since 2016 · 133 posts · 79 votes

@Chauncy Gray

Hello , the only time I would be concerned with shortening the 30year term is if your primary residence. Like others said it’s an investment property buy right and make sure it cash flows

Jacob Rzewnicki

Piscataway New Jersey · Member since 2019 · 29 posts · 11 votes

@Chauncy Gray the power of compound interest, amiright?? Lol.

In all seriousness though, when you borrow any money there’s going to be a price to pay. While it seems crappy that you have to pay so much in interest, it’s a necessary evil, unless you’re balling enough to buy everything in cash. As long as the mortgage payment is factored into your numbers and you’re still able to cash flow that’s all that really matters. No matter where you leverage money from there’s going to be some form of interest, that’s why you need to make sure the deal is worth your while.

0 Reply

Jim D.

Investor · United States · Member since 2015 · 415 posts · 487 votes

Using as many 5% down, low fixed-rate 30 year mortgages as possible has probably made me more money than anything else in real estate investing. I have never paid one penny of interest; my renters pay for all of it. The interest expense is greatly outweighed by the following benefits:

Ability to buy more properties faster, rather than saving up cash for each one
ROI is heavily amplified by having leverage
Ability to deduct interest on taxes
Time value of money

Regarding early payment of loan: if you have $10,000 sitting around, and decide to put it towards paying down extra principle on one of your loans at 5%, it will save you exactly $500/year. It is literally identical to investing that money into a 5% fixed-return investment. If you want a fixed 5% illiquid return, then this makes sense, but you can earn far higher returns by investing the $10,000 elsewhere.

Tony Kim

Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes

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

Originally posted by @Chauncy Gray:

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:

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?

When you consider just how long a period of time 30 years is, then those numbers are TERRIBLE......for the Bank.

Bank doubles their money in 30 years... meanwhile, your property will be worth God knows how many multiples from your original purchase price....all while providing you with good cash flow for 30 years.

Irina Belkofer

Real Estate Broker · Cleveland, OH · Member since 2017 · 719 posts · 658 votes

Money are not free: you are buying time, it worth every penny.

Your Tenants pay the mortgage, interest in it, taxes, insurance and then some.....if you’d saved these money you borrowed, you’d wait 10-15 years to buy that income producing asset.

Your primary residence is an exception, however, HELOC on it still let you put downpayment on these rentals.

It’s wiser to not think how much banks make on your mortgage but rather understand how much you make off that asset

4 Reply

Mark Welp

Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes

@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.

30 year mortgages are fine; especially if you have the tenant paying down the debt. Thanks,

Michael Ealy

Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes