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Ever Wonder How a Mortgage Actually Works?

Guest Blog from Marshall Reddick Real Estate Network

Have you ever examined an amortization schedule for a 30 year loan? Odds are the answer is no. Schools don’t teach it, most college professors don’t even understand it, and banks don’t want you to learn it.  However, today is your lucky day! The truth will set you financially free.

Mortgages are a wonderful tool to use when building wealth. Be careful though, because banks have done everything to stack the cards in their favor, and you need to know exactly how a mortgage works in order to properly use them.

You may be surprised to learn that you pay primarily the interest portion of the loan off first, and finish the loan term paying the principal portion. In fact, for the first 10 years of your loan, you pay less than 20% of your principal. The reason mortgages are set up this way is because the average borrower only holds a mortgage for 7 years before selling their home and moving into a new one. It is not until year 17 that you start paying more principal than interest.

Below is a 30-year fixed mortgage (100K loan amount @ 5% int. rate) completely dissected for you to see in plain view:

Year Annual Principal Annual Interest Loan Amount


 $       1,475.37  $       4,966.49  $    98,524.63


 $       1,801.27  $       4,640.59  $    91,828.73


 $       2,311.67  $       4,130.19  $    81,342.06


 $       2,966.70  $       3,475.16  $    67,883.91


 $       3,807.34  $       2,634.51  $    50,612.27


 $       4,886.19  $       1,555.67  $    28,446.56


 $       5,965.52  $          476.33  $       6,270.73


Leverage: By using other people’s money (OPM), specifically the bank’s, you can control much more property and become much wealthier than if you attempted to do it on your own without borrowing.

Inflation: Think of what you paid in rent 25 years ago. Now understand that your mortgage payment in 25 years from now will be the same, however the rents will increase.

Forced Savings Account: Your principle loan amount goes down each month, but who is paying that? As each month passes by and life goes on, your tenants will be paying down the principal and building YOU equity as you collect their rent and use it to pay your mortgage!

Appreciation: Over time, if you purchase in the right markets, home values go up.  If you can control $400,000 in real estate with $100,000 of your money and $300,000 of the bank’s, and spread that out over 4 properties, you will be a happy camper as values increase.

Tax Advantages: You should never invest in real estate simply to lower your adjusted gross income. You should invest in real estate to get a great return on your money! However, it’s important to know that mortgage interest write offs are a huge benefit when sheltering W-2 and rental income from Uncle Sam.


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