COVID-19 Update: Beaird Harris has shifted a significant number of our team members to work remotely.
We continue to serve and care for our clients, just as we always have, and are available by phone, video or email.

Beaird Harris is closed on Thursday, February 24th due to inclement weather. 
During this time our team will be fully available via phone or email should you need assistance. 

Beaird Harris will be closed on Friday, July 3rd in observance of the Independence Day holiday.

Blog

This Bank Secret Can Be Yours

Genny Cordell

Every banker knows that the majority of the money they make on a loan is made in the first few years of the loan. By understanding this fact, you can greatly reduce the amount you pay when buying your house, paying off your student loan, or buying a car. Here is what you need to know:

Your Payment Never Changes

When you obtain a loan, the components of that loan are interest, the number of years to repay the loan, the amount borrowed, and the monthly payment. Assuming a fixed rate note, the payment never changes. Here is an example of a $250,000 loan.

It is important to note that your payment in month one is $1,158 and your monthly payment thirty years later is the same amount…$1,158.

Each Payment Has Two Parts

What does change every month is what is inside each payment. Every loan payment has two parts. One is a payment that reduces the amount of money you owe, called principal. The other part of the payment is for the bank, called interest expense. Now look at the component parts of the first payment and then the last payment:

So while your monthly payment never changes, the amount used to reduce the loan each month varies DRAMATICALLY. Remember your total cost of borrowing $250,000 includes more than $166,000 in interest!

Use the Knowledge to Your Advantage

Here’s how you can use this information to your advantage.

For New Loans

  • Only sign up for loans that allow you to make pre-payments without penalty. 
  • When borrowing money, keep some of your cash in reserve. Try to reserve a minimum of 10 to 20 percent of the amount borrowed. So in this example, try to reserve $25,000 to $50,000 in cash.
  • Immediately after getting the loan, consider using the excess cash as a prepayment on the note. By doing this you can dramatically reduce the interest expense over the life of the note, all while keeping your payment constant. Even though your monthly payment may be a little higher, the extra payment amount will pay back the loan more quickly.

For Existing Loans

  • Create and look at your loan’s amortization table. This table shows how much of each payment is used to pay down the loan balance and how much goes to your lender as interest. In the above example, 67% of the first payment is for the bank, while only ½ of 1% of the last payment is for the bank.
  • Pay more to you than the bank. Aggressively prepay down any loan until more of each payment goes to you versus the bank. This is the crossover point of your loan.
  • Find your sweet spot. After hitting the crossover point, next consider the efficiency of each prepayment and determine when you consider your prepayment ineffective. No one would consider prepaying that last payment when interest expense is only $4.00. But if more than 25% of the payment goes to interest? Keep making prepayments.

Final thought

When you make a prepayment on a loan, reduce the loan balance by your prepayment, then look at the amortization table. See how many payments are eliminated with your prepayment and add up all the interest you save. You will be amazed by the result.

No Professional Advice, Client Relationship, or Reliance on Information

Please note that any information or content on our Website, or any forms or tools on our Website which allow you to submit information or make calculations, and your use thereof, are not intended to provide any kind of professional advice, consultation or service, including but not limited to, legal, accounting, tax, or business advice. Nor does any such information, content, forms, or tools, or your use thereof or reliance thereon, create or constitute an attorney/client, accountant/client, or consultant/client relationship. You should therefore not use our Website or reliance on any information, content, forms, or tools on our Website as a substitute for any kind of professional advice. Rather, you should consult with a licensed professional, including one employed by our Company, for any accounting or tax questions you may have. You agree that we will not be liable to you or to any third party to the extent you treat or consider any information, content, forms, or tools on our Website as constituting any kind of professional advice. The information and content, including but not limited to forms and tools, presented on or made available through our Website are made available solely for general information purposes. We, therefore, do not warrant the accuracy, completeness or usefulness of any such information, content, forms, or tools, and any reliance you place on the same is strictly at your own risk.  We disclaim all liability and responsibility arising from any reliance placed on such materials by you or any other visitor to our Website, or by anyone who may be informed of any of its content.

Our Website provides illustrative lists of services that we provide. Nothing contained on our Website shall be construed as an offer or guarantee to provide any particular services to you, nor shall anything on our Website be construed as a direct solicitation for employment by any persons, companies, or organizations. Prior results we have obtained for others do not guarantee a similar outcome.

Share This
Share on facebook
Share on twitter
Share on linkedin
Share on email
schedule call

Schedule a complimentary call today.

We’ll help you get started and learn more about Beaird Harris.