When I was in college I was never afraid to ask very simple and obvious questions. Because I knew in order to fully understand something, you need to understand the basics.

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1. Break Down Step by Step
– There are usually 3 parts to a loan
– You have the actual money you borrowed that called the Capital
– You have the interest that you are going to pay ( that called the profit to the lenders )
– You have the fees to the loans ( early payment fee, origination fee, and all that nonsense ) – but their usually one time fees

So let’s Use a Simple Example:
– My name is Tommy and I want to buy a new camera, and this camera cost $10,000 dollars
– Now Jimmy my best friend has agreed to lend me the money with a promissory note
– He’s going to give me 5 years to pay the money back in full while making a monthly payment, and his only going to charge me 18% on the loan ( plus according to Jimmy there were some fees involved so he charged me 1% of the loan for that )

Mathematical Break Down:
– There are two ways to pay this loan, I follow the schedule Jimmy Set for me ( so payments are $126.97 per month over a 5 year period and he makes a 50% profit )
– Or I can ask Jimmy, can I make extra payments towards the money I borrowed, and he says yes. As long as you make regular payments on the due date
– So I just pay an $200 a month extra. And I finish in 1 year and a half and jimmy only makes $700 bucks

However Bad news:
– Jimmy is a snake
– He included a prepayment clause In the contract that I just didn’t see
– So he charged me 5% of the loan ( which is $250 bucks )

Tip: me and Jimmy haven’t spoken since. But you guys get it, capital is the actual money I borrowed, and as long as it’s agreed on the loan, I can make extra payments towards it.

2. Mortgage Example
– Every lender usually has different rules, but you want to find a lender with a flexible prepayment policy
– Usually after 5 years they don’t charge you a fee and even if they do its just 2% of the loan amount
– So let’s use a mortgage example
Keep in Mind:
– Some lenders don’t allow principle only payments
– And you cant just send in extra money and expect it to be done automatically
– You have to call them and ask them to use the extra money for principal paydown or send a check saying principle only or sometimes they do it automatically ( but the only way to know for sure, is to contact them and ask )

Let’s Go back in to the Example:
– I’m Tommy Bryson, and I want to buy a house 300k, 20% down, and no more than 33% of my income
– By November 26, 2020, I finally pay more towards capital ( bank profit 129k)
– By movement 26,2028 with the extra payment of 15% I pay almost4 times more money towards capital and finish 16 years early ( bank profit $58k)

Tip: so obviously paying extra is a good idea and 15% is my rule

3. When not to do this ( other High-interest Debt )
– If you bought a house but you still other debt
– Like credit card debt, personal loans, or Students loans
– Focus 15%-25% of your money or how much you have
– Towards paying that debt off first

Because remember:
– They are charging 18-35%
– And it’s going to be impossible to get rich paying someone all that money
– That’s my advice usually is, get debt free first before you buy a house

Tip: that’s why you see a lot of people, that have so many loans, the interest is so high, to the point where they cant afford to pay any capital.

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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