Shawn from the book just bought a house. To get into his house, Shawn went to school, got an education, got a good job, saved money for a down payment, and bought a house. Congratulations, Shawn! Anybody that can qualify for and buy a house is an excellent manager of money.
However, after buying his house, Shawn suddenly noticed that he didn’t have as much extra money as he used to. Homes are expensive! And he found that after achieving his goal of buying a home, he wasn’t sure what to do with his money next. Shawn meets Rick, and Rick gives him some TIPs about homeownership.
This is Shawn’s mortgage.
As you can see:
- This is a 30-year mortgage
- Shawn borrowed $250,000 for 30 years at an annual interest rate of 6.5%.1
- Shawn’s monthly payment is $1,580.2
- Each monthly payment is comprised of Principal & Interest.
- Principal + Interest = Monthly Payment
- As Shawn (the borrower) pays off Principal debt, the Principal portion of the monthly payment gets bigger, and the interest portion gets smaller.
- Shawn will pay more interest in his payments than principal on this loan for most of the loan.
- If Shawn were to make all payments on time, Shawn would pay more in interest on this loan than he originally borrowed.
- In fact, Shawn would pay $318,861 in interest for a house he “bought” for $250,000.
- Shawn would pay $568,861 for a $250,000 house.
- These numbers will be used throughout the book and are excellent for illustrative purposes. Each mortgage is unique, and your math will be unique to your mortgage. These numbers will be used to understand the concept. After you understand the concept, you will be ready to use tools to apply it to yourself. ↩︎
- The monthly payment here is Principal + Interest which are exclusive to the debt. Other non-debt related fees usually added to a mortgage payment are Taxes and Insurance. You will pay these whether or not you have a mortgage, so for financial education purposes, only Principal and Interest will be used. ↩︎