Let’s say you have a $200,000 loan with a 2.75% rate on a five-year term. Based on a 25-year amortization period and a monthly repayment schedule, this would yield the following results after five years:
Interest Paid = $25,381.75
Total Principal Repaid = $29,879.45
Using the same assumptions as noted above, except with a 3% rate of interest, the math looks slightly different:
Interest Paid = $27,738.70
Principal Repaid = $29,050.70
Difference in Interest Paid over 5 Years = $2,356.95
Difference in Principal Repaid over 5 Years = $828.75
Total Savings Represented by only a 25-Basis-Point Reduction in Rate over the Term = $3,185.70!
Let’s take this exercise one step further by considering the following example:
If you were to take the savings from above and divide it by 60 months (5 years), you would end up with $53.10 per month in savings. If you were to take this same amount of savings and place it into a tax-free savings account with an assumed rate of growth at 5%, you would have accumulated $31,229.22 over the course of 25 years, which just so happens to be the same period of time as the original amortization on the mortgage.
We’ll put that in plain, simple English: After 25 years, not only would you have your mortgage paid off in full, you would also have over $31,000 in investments! This demonstrates how a solid financial plan can mean the different between being just “comfortable” versus having more financial freedom!