But the truth is, it is how you are able to buy your first home, second home, third, fourth, fifth, tenth, right? So I want to show you both sides. That is what a real teacher should do, is show you both sides of the equation so you make the best informed decisions when it comes to your loan. Now, you get to write off the interest on that loan that you lose every time and you lose it every time you refinance. That’s what we’re going to talk about as well, okay? So the question is, what is amortization? Well, amortization is an accounting technique used to periodically lower the book value of a loan or an intangible asset over a set period of time.

Concerning a loan, amortization focuses on spreading out loan payments over time. The truth is, most people don’t even read the amortization schedule that is handed to them the day they sign their loan documents. And it’s very important you see that because you need to understand how much you’re giving to the bank and how it goes down over time and how you’re front loading that amortization to the bank. And the reason why I want you to think about that is because you’re going to second guess refinancing at a 1% drop, okay? Amortization is used in the process of paying off debt through regular principal and interest payments over time.

An amortization schedule is used to reduce the current balance of a loan. For example, a mortgage or a car loan through installment payments. Amortization can refer to the process of paying off debt over time in regular installments or interest in principal sufficient to repay the loan in full by its maturity date. A loan amortization schedule represents the complete table of the periodic loan payments. We’re going to show you one in a second. Showing the amount of principal and interest that comprise each level of payment until the loan is paid off at the end of its term.

A higher percentage of the flat monthly payment goes towards interest early in the loan, but with each subsequent payment, a greater percentage of it goes towards the loan’s principal. That’s why we really want to show you the reality of refinancing. Amortization can be calculated by using most modern financial calculators, spreadsheet software packages like Excel, or online amortization calculators when entering into a loan agreement, the lender must provide a copy of the amortization schedule. Amortization schedules can be customized based on your loan and your personal circumstances with more sophisticated amortization calculators.

You can compare how making accelerated payments can accelerate your amortization. If, let’s say for example, you are expecting an inheritance or you get a set yearly bonus, you can use these tools that I’m about to show you to compare how applying that windfall to your debt can affect your loan’s maturity date and your interest costs over the life of the loan. So let’s dive in right now and I’m going to put a link to this website down below so you can start messing with it, looking at your current situation or the mortgage you’re about to get.

Let’s just dive in, check it out. All right, this is out of Investopedia. It’s an excellent amortization calculator. So what we’re going to do for all these videos, we’re just going to put out a nice round number, which is ironically close to the median and average home price in America. As a matter of fact, it’s lower than this, but we’re just going to throw this in there. So on a loan amount of $500,000, you can expect to pay on a 30 year fixed rate mortgage, right? $3,326 going towards interest and principle.

That’s just your interest and principle, not your insurance and taxes, right? Now we put 7% because that’s about as of the recording of this video rates, but it’s also a very important rate because it’s the average rate over the last 40, 50 years, except where it’s been very skewed over the last 20. There’s times where it’s higher, there’s times when it’s lowered, but average 7%. Now you could see right here from this chart, interest being the orange, right? And principle being the blue. So how do you take all this in? Well, first off on day one, the first payment, May of 2024, look at how much of that percentage of interest is of that payment is going towards interest.

The bank gets it. You don’t get it. $2916 and only $409 of it goes towards interest. And you could see the payment breakdown below where you could see right here, principle interest equals payment, right? And this is the entire year right here. And you could break it down over months, but this is 2024, 2025. And you could even click here and you could check out all the months right here. You just hit the positive, the plus 409 going to principle the first month, 2900. And you can see over time, over the years of your loan, how it gets much smaller until boom, you’re paying off zero.

Well, this is the most important thing you need to realize when you have two or three years of mortgage payments already under your belt. And let’s say you’re at a 7% interest rate, but all of a sudden rates drop to six. This is the dangerous thing for three years. You’ve already paid that much towards interest. And most people refinance because they want to lower payment, but what it does is it starts the cycle over again and it shoots you right back into that 30 year mortgage. And you’re right back to putting that massive percentage of your payment, giving it to the bank.

You’re never going to get it again. Most people focus on saving a couple hundred dollars a month. And they need that relief, but they don’t realize they just threw away all that money. And the likeliness when that payment gets dropped because they refinanced into, let’s say a new 30 year fixed at 6% and they’re saving a few hundred hours a month. What’s the likeliness that they are going to take that $300 and savings and continue to put it on the payment. It’s almost zero. The facts are barely anyone ever stacks that additional savings on, but you can use this tool that I just showed you that if you’re considering a new mortgage and you’ve got three years under your belt paying, let’s say an average of 7%, you go, I’m about to get a new mortgage and let’s just show you the savings.

Let’s go down here to three years and let’s see where we are. One, that’s two, three. So it’s two and a half years. You’re down to total interest paid $92,000 in three years at 7%. Right. But it says the remaining balance is 485, 600. Holy cow. So let’s go up here. Let’s go 485, 485, 600. And now you’re going, Hey, I’m going to go with a new loan and remember it was 3,300 bucks a month. It’s now going to be six, right? But it’s going to get every amortized into a 30 year loan.

So now you’re at 2,900. You’re saving almost 400 bucks a month. Let’s just say 400 for easy math. All right. So you’ve given away $95,000 in interest already. You’re going to pay additional fees to go and refinance this loan and you’re resetting the clock. So let’s go back now at 6%. You’re saving 400 bucks. But again, there’s that amortization schedule, right? How much of it in the beginning is towards interest. So you look and you go, let’s check out the immediate thing. Principal, I’m right back to almost the exact same amount getting paid towards principal and the same amount towards it’s less in interest, but you’ve got to look at how much you just spent.

So that’s why you go, you know what, I’m going to stack on that extra $300 or $400 a month because this is killing you financially. And most people are in an absolute doom loop when it comes to refinancing. All they care about is, please, I need the savings. I need the savings. Why? Because I want to be able to get more things I can’t afford. I’m going to go and spend recklessly. So I want you to have all the tools for success and this is de-risking everything. And this is really going to play into account when you turn around and you go to refi over when the Federal Reserve starts dropping rates aggressively.

That’s when it starts to make sense. But only if you take that additional amount of savings and stack it against the new loan. That’s what I want to see you do. Because I want you as soon as you can to pay off your first home so that you can go, wrap that up into a trust. We’re going to talk about equity stripping and then protect yourself legally, financially that way. Then we’re going to move off into rentals. That’s a whole new realm. That’s where the rental course, you know, when you start buying rentals, you want to squeeze every dime out of it.

The intention is not to pay off your rentals. I know that sounds crazy, but this is your personal home. We want to get it paid off. I want you to have a clear mind, clear conscience, and the peace inside to go forth and crush it. I hope you got something out of this. Let’s move on to the next mortgage lesson. [tr:trw].

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