Author Topic: Tony Robbins book Money: Master the Game he claims to cut your mortgage in half  (Read 3569 times)

Chris C

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In Tony Robbins book Money: Master the Game he claims cut your mortgage in half by writing your monthly mortgage check and then writing a second check for the principal-only portion of the next month’s payment. Here’s the example he gives:

“A 30 year loan at 6% requires an initial monthly payment of $1,618. With this technique, you would also write a second check for an extra $270- next month’s principle balance- a very small number, relatively speaking. That second check of $270 is money you’ll never pay interest on. To be clear, you’re not paying extra money: your simply prepaying next month’s principle payment a touch sooner.
Hold yourself to this pay-it-forward strategy each month, and, again you’ll be able to pay off a 30-year mortgage in just 15 years- cutting the total cost of your home by close to 50%.”

Is this real? How does the math behind this work?
« Last Edit: June 13, 2019, 12:51:05 PM by Chris C »

caracarn

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I'd have to run numbers to see if it is really 50%, but yes you can save a lot doing that.  If you have some intermediate Excel skills you can build and amortization schedule for a 30 year mortgage in about 10 minutes with the ability to have a column with prepayment. 

You have to remember, that especially in the beginning and up until about year 20 if I recall correctly your interest is larger than your principal in the payment.  You need to be careful that you bank knows this is to go to principal.  I have had cases when they just apply it to interest in the following month's payment without directions so monitor this closely.
« Last Edit: June 13, 2019, 02:48:28 PM by caracarn »

RWD

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$270k mortgage at 6% interest making payments of $1888 will take ~21 years to pay off instead of 30.

I assume he is increasing the extra amount with each month to match the principal portion. That method would indeed pay off the mortgage in ~15 years, though note that since your payments are slowly increasing eventually it would be nearly a double payment (~$3200 payment). The math works out for this because every month you are paying off twice as much principal as was expected for the 30 year loan.

As a side note 6% interest is very high these days. If you have a much more typical mortgage (say ~4%) then you probably shouldn't even be considering extra payments and should be investing instead. If you invest instead (4% mortgage scenario and assuming 9% nominal investment returns) at the 15 year mark you'll have enough invested to pay off the mortgage and an additional $77k to spare.

MrThatsDifferent

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Why have you posted this in this section?

Chris C

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Not sure, I thought this would be the place. My apologies if it's not. 

BicycleB

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@Chris C, it looks like your post ended up in the section for questions and discussion about raising children (and teaching them about money). Early post, no big deal - and good question.

Sections it might normally go in include "Ask A Mustachian", which is good for almost any question that seeks advice, or "Real Estate and Landlording", which is focused on real estate investment but includes homeowner questions like mortgages.

Welcome to the forums!

Dicey

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Contact a moderator and they'll move it for you. Just use the Report button. It works for good or evil, hahaha.

martyconlonontherun

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There are different versions of this. One of the more famous books I can't think of right now suggests paying half your mortgage bi-monthly. So instead of paying 12x a year you pay 13x (26* 1/2 payment) so you get in one extra payment each year. Since it is within your paycheck cycle, it is really nice and easy for beginners. That said, you are better off investing/contributing more to your 401k if you are more advanced.

socalrider

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If you have a 6% mortgage your first step should be to refinance, no?  While doing that, you can switch to a 15 year mortgage (often at a lower rate), thus 100% guaranteeing that you will pay off your 30 year mortgage in 15 years if that's your goal. 

There's no magic in finance, it's just math.  I'm too lazy to make a spreadsheet, but this seems like silly advice, a "trick" for people who don't understand compounding.  For one, principal payments will increase as the mortgage amortizes, so thinking that an extra $270/mo will cut this mortgage in half is not correct. 

jamesbond007

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It is true in general. But do your math. My 30 year fixed is 3.625%. So I put aside an extra $1000 a month towards "principal" but I invest that in VTSAX. When the VTSAX balance equals my mortgage balance, I repay the loan. My thinking behind this is that if VTSAX stays relatively flat (highly unlikely) then I lose nothing. It would be the same as the scenario you described. But if VTSAX is increasing 7% in average YoY (taking into account inflation and downturn) then I will likely pay off my mortgage in 10 years instead of 15. Yes, I'd have to pay tax on gains but it would be less than the stupid amount interest anyway. IMO, this is a Win-Win.

ReadySetMillionaire

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In Tony Robbins book Money: Master the Game he claims cut your mortgage in half by writing your monthly mortgage check and then writing a second check for the principal-only portion of the next month’s payment. Here’s the example he gives:

“A 30 year loan at 6% requires an initial monthly payment of $1,618. With this technique, you would also write a second check for an extra $270- next month’s principle balance- a very small number, relatively speaking. That second check of $270 is money you’ll never pay interest on. To be clear, you’re not paying extra money: your simply prepaying next month’s principle payment a touch sooner.
Hold yourself to this pay-it-forward strategy each month, and, again you’ll be able to pay off a 30-year mortgage in just 15 years- cutting the total cost of your home by close to 50%.”

Is this real? How does the math behind this work?

Unless I'm missing something, I think what this example misses is that your "extra principal" payment will be significantly higher towards the end of the loan. 

Yes, at the beginning, hardly anything is going to principal. But towards the end, you are looking at a pretty large additional payment every month.

wenchsenior

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Saw this thread and it made me think... mortgage for 30 years? Isn't it dangerous? It's like - I had a simple car loan and it gave me a lot of headache. Don't understand the thing about those mortgages for 30 years.

?  Not sure how a simple car loan or a 30 year mortgage (the most common way most people buy houses in the U.S.) would be either confusing or cause headache...they are very straightforward...are you in a different country?

Simpli-Fi

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It is true in general. But do your math. My 30 year fixed is 3.625%. So I put aside an extra $1000 a month towards "principal" but I invest that in VTSAX. When the VTSAX balance equals my mortgage balance, I repay the loan. My thinking behind this is that if VTSAX stays relatively flat (highly unlikely) then I lose nothing. It would be the same as the scenario you described. But if VTSAX is increasing 7% in average YoY (taking into account inflation and downturn) then I will likely pay off my mortgage in 10 years instead of 15. Yes, I'd have to pay tax on gains but it would be less than the stupid amount interest anyway. IMO, this is a Win-Win.
I like this approach, however I'd be the type that says, WOW what if I did this for one more year to see the snowball get bigger...one more year......and finally pay the mortgage off with a lump sum once my gains = the balance...then I'd probably never do that either...

jamesbond007

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I like this approach, however I'd be the type that says, WOW what if I did this for one more year to see the snowball get bigger...one more year......and finally pay the mortgage off with a lump sum once my gains = the balance...then I'd probably never do that either...

You are still winning though :)

Viking Thor

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In Tony Robbins book Money: Master the Game he claims cut your mortgage in half by writing your monthly mortgage check and then writing a second check for the principal-only portion of the next month’s payment. Here’s the example he gives:

“A 30 year loan at 6% requires an initial monthly payment of $1,618. With this technique, you would also write a second check for an extra $270- next month’s principle balance- a very small number, relatively speaking. That second check of $270 is money you’ll never pay interest on. To be clear, you’re not paying extra money: your simply prepaying next month’s principle payment a touch sooner.
Hold yourself to this pay-it-forward strategy each month, and, again you’ll be able to pay off a 30-year mortgage in just 15 years- cutting the total cost of your home by close to 50%.”

Is this real? How does the math behind this work?
It's not exactly as described. You are paying extra money, the next month you will need to pay the full required monthly payment (doesn't matter that you paid some extra principle early), and keep adding extra payment each month. It's basically like executing a 15 year mortgage, but paying extra interest since there is a 30 year mortgage rate. Not the best idea.

Simpli-Fi

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^what is flexibility worth?

Viking Thor

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I guess the part that bothers me about this is how it sounds like it's presented, like it's some great hack, and in a confusing way that almost portrays it as free money.

If someone wants to pay down their mortgage early - fine. There are certainly tradeoffs and if the goal was to give sound advice the tradeoffs and other alternatives should be explained.

I.e keep the 30 year and invest, or if you want to pay it off ear!y it might be better to just get a 15 year mortgage, or get a 7/1 ARM and get ahead in principle during the initial 7 years.

Rosy

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This is one of those threads that should be a sticky - fixed thread for all of us who are not exactly top of the class when it comes to math, maybe even for those who are good at math, but didn't pay any attention and simply followed the usual path of acquiring a 30yr mortgage without much thought.

Thanks to all of you who have presented even better alternatives or simply explained how it all works - in terms that make perfect sense.
Win-win plus clarification - you guys are the best.

Tony Robbins may be a great motivator, but I don't think I'd rely on his financial advice unless like the OP I researched it further on my own.
Just sayin'.

Dicey

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Here's a little fun reading for those who really care to learn more about mortgages. We don't bite, I promise...

https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

Tester

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I don't want to spoil it for everyone, but yes, it cuts your mortgage in half if you pay more than the monthly payment amount 😁.
I bet nobody expected that.
On the other hand, yes, it  is good advice to pay more than the installment if it makes sense.
I think that is not targeted toward people here, but more towards the rest.

Lucky13

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I was lucky to learn this in my 20s and it blew my mind. actually looking back, this probably taught me that "the financial industry" doesn't tell you everything you need to know, and so I was receptive to MMM and similar philosophies.  Once you start to see "the Matrix" there is no going back. :D