If you’ve ever marveled at the stealth wealth potential of mortgage payments, then this week’s featured article by the Darwinian Doctor is your ticket to leveling up your knowledge about powerful wealth-building strategies.
Are you ready to unlock the secrets of building stealth wealth?
Whether you’re a homeowner or interested in rental properties, understanding principal paydown is essential for maximizing your wealth.
Don’t worry if you’re not familiar with the term, because this article is designed to be your guide!
Real Estate is More Than Cash Flow
Real estate increases your wealth in multiple ways. Most people only think about one financial benefit from real estate: the cash flow from rent. But there are equally powerful factors like appreciation, tax benefits, and using real estate as a hedge against inflation.
The component of real estate that gets the least publicity is principal paydown. But principal paydown can be a very effective way of adding to your wealth over time too.
Today, I’ll go over the concept of principal paydown and use my real estate portfolio as an example to lend real numbers to this stealth wealth strategy. As a preview, principal paydown is currently adding about $7000 to my net worth every month.
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To understand principal paydown, you have to understand how a typical mortgage loan works. In the United States, most people use a 30-year mortgage with a fixed interest rate to purchase a home. Each month, you make a monthly mortgage payment to the lender. A portion of the payment goes towards paying interest and a portion goes towards the principal balance.
The “principal” is the amount you borrowed from the lender and have to pay back. The “interest” is the fee the lender charges you for the privilege of borrowing money from them.
As your mortgage principal decreases, you own more and more of your home outright. After 30 years of payments, the mortgage term concludes, and you now own 100% of your home. Congratulations!
Your Monthly Payment
Your monthly payment is affected by many factors including the purchase price, the down payment, mortgage rates, and the loan term. Right now, with the war on inflation from the Federal Reserve, interest rates are very high. This makes a huge difference on the loan payment of new homeowners
Although your payment is the same every month if you have a fixed-rate loan, your ratio of interest to principal varies over the life of the loan. This is because your principal balance is higher in the beginning of the loan, so the amount of interest you owe is higher as well. As you get towards the latter half of your loan term, you owe significantly less principal, so your interest payment becomes less as well. This allows the same monthly payment to pay down more and more of your mortgage balance each year you keep your home.
The $100,000 House Example
Let’s map out a 30 year mortgage lifespan for a $100,000 home to illustrate this concept.
For this example, let’s assume a 20% down, 5% fixed mortgage rate, and a 30-year term. This yields a monthly payment of $429.46, which is $5,153.49 a year.
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