Mortgage Basics: 1 = 5

Shawn from the book is getting excited about saving some money! But it gets even better.

• If you prepay your mortgage, you will save interest.
• If you don’t prepay your mortgage, you will pay interest.
• You don’t have to prepay your mortgage, but if you don’t, you will pay interest.

Committing to paying off the mortgage is hard, and making prepayments is hard. The tough thing about prepaying your mortgage is:

• You will still have mortgage payments.
• You save at the end of your mortgage, but your next month’s mortgage payment is still the same.
• You don’t exactly have immediate, liquid access to those funds anymore.
• When you make a mortgage prepayment, it might feel like it is gone.

But you need to remember, that $1 prepaid goes right to your home’s equity. That $1 is yours. And I’ll teach you how you can access it, later. But for now, just know that you’re not paying your uncle $1 to invest. You’re not paying some broker $1. That $1 goes straight to you. Straight to your home’s equity.

So, here is a more accurate example of what happens when you make a prepayment.

As you can see:

• In year 20, ($1 prepaid) + ($1 saved interest) = $2.
• If you wait until year 24, ($1 prepaid) + ($0.50 saved interest) = $1.50.
• In year 14, $1 prepaid = $3 saved
• In year 9, $1 = $4.
• In year 6, $1 = $5.
  • And it scales!
    • $1 = $5
    • $10 = $50
    • $100 = $500
    • $1,000 = $5,000
    • $10,000 = $50,000

For the typical new homeowner, $1 = $5. Or more!

1 = 5.