Example Worksheet
Principal Reduction benefit is perhaps the easiest benefit to calculate–and one of the easiest to achieve. Through the rents your tenants pay, you are building equity in your investment property. Put simply, your tenants are buying you a building, or house, etc. This is a great example of using OPM (other people’s money) to create wealth! Each year the equity will increase and you have an asset that is throwing off cash. Life is good! In our example your financing terms are:
$132,000 for 30 years at 7% interest.
Plugging the numbers into any mortgage amortization calculator, you can see from the first year amortization table
| Month | Payment | Interest | Principal |
|---|---|---|---|
| YTD | YTD Principal | YTD Interest | Loan Balance |
| $1,340.88 | $9,197.52 | $130,659.10 | |
| January | $878.20 | $770.00 | $108.20 |
| February | $878.20 | $769.37 | $108.83 |
| March | $878.20 | $768.73 | $109.47 |
| April | $878.20 | $768.10 | $110.10 |
| May | $878.20 | $767.45 | $110.75 |
| June | $878.20 | $766.81 | $111.39 |
| July | $878.20 | $766.16 | $766.16 |
| August | $878.20 | $765.50 | $112.70 |
| September | $878.20 | $764.85 | $113.35 |
| October | $878.20 | $764.19 | $114.01 |
| November | $878.20 | $763.52 | $114.68 |
| December | $878.20 | $762.85 | $115.35 |
Interest payments decrease over the life of the loan and the Principal payments increase. By the end of the first year there is a
Principal Reduction of $1,340.88
On your worksheet, verify that the Annual Debt Service, i.e. the annual mortgage payments, less interest payments from the amortization table gives you the same value as listed above ($1,340.88). Make sure your worksheet looks like this before we continue to what may be the best benefit yet — the all powerful Depreciation Benefit Analysis.
Return from Principal Reduction Benefit Example to Benefits of Real Estate Investment
