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How to cut your mortgage in half
One simple strategy that will save you hundreds of thousands
Legal Disclosure: Tony Robbins is a board member and Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity and based on increased business derived by Creative Planning from his services.
“It’s a pity,” mortgage expert Marc Eisenson, author of The Banker’s Secret, told The New York Times. “There are millions of people out there who faithfully make their regular mortgage payments because they don’t understand […] the benefits of pocket-change prepayments.”
What are pocket-change prepayments?
When you sign on the dotted line and take on that 30-year fixed-rate mortgage at 6%, as much as 80% of your mortgage payments will go toward interest. Ouch. In fact, your interest payments will tack on an additional 100% or more to your loan value. To find out how much you’ll pay in interest on your own home, use this calculator.
In order to maximize your payments and end up paying less interest, you simply need to start making payments against your principal along with your normal monthly payment. So the next time you write your monthly mortgage check, write a second check for the “principal only” portion of next month’s payment.
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The not-so-magic math, in action
For example, the average American home is $270,000. (This strategy, however, works whatever the cost of your home). A 30-year loan at 6% requires an initial monthly payment of $1,618.
With this technique you would make your usual monthly payment, and then you would also write a second check for an extra $270, which will cover next month’s principal balance. If the whole $270 – or whatever your number is – seems out of reach right now, pay whatever you can. It will still add up. If you continue to do this every month, you will never have to pay interest on the principal that is pre-paid.
To be clear, you are not paying extra money; you are simply paying a little bit sooner, and saving yourself potentially hundreds of thousands in the process. Imagine being free from mortgage payments in just 15 years instead of 30. Would that make those small sacrifices now worth it?
If you aspire to home ownership – or if where you live, owning a home makes more financial sense than renting – taking this one simple step can eliminate one of the single largest expenses of your life.
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