The Hidden Truth About Mortgage Costs (It's Not Good)
12:06 Share

Can I just come out and say it? Mortgages are a scam.

Kind of. Because if you realized how much your house is actually costing, you'd blow a breaker. And today we're going to cover the insane math of mortgage costs and how you can skip the scam and save hundreds of thousands on your home. But let's start with how a mortgage works. Now, obviously, in a perfect world, we could all pay cash for a house and it would be as simple as trading your lemonade stand money for Blaine's Charizard. But in the real world where I live, homes cost a pretty penny. And most people don't have hundreds of thousands of pretty pennies lying around. That's where banks come in.

Your business formal pals at the bank offer to lend you money to buy a house, and in turn, you pay the bank back what you borrowed, plus an extra bit called interest. Think of it as a thank you for borrowing their money. A little tax. A little thank you tax.

So you guys agree to an interest rate and a time frame you'll pay the loan back in, usually 15 or 30 years, and that determines what your monthly mortgage payment is. As long as it's a fixed rate mortgage, which is the only type I ever recommend, that will be the same amount you pay every month for the life of the loan. What a lot of people don't realize is that most of their payment for the first few years is mostly interest. It's not actually knocking down the principal at all. And here's why. The interest is based on the full loan amount. So while the balance is high, the interest will stay high.

But as you pay down the loan, more of your payment will go to principal and less to interest. This is called amortization. And the bank's not just doing this out of the kindness of their heart. They're getting a pretty sweet deal here because thanks to interest, banks bring in an estimated $640 billion annually from residential mortgages alone. And that's allowed the banks to do a lot of great philanthropic things that benefit the world, like buying the naming rights for skyscrapers, major stadiums,

and arenas. So that's how mortgages work, and when they're pulling in nearly three quarters of a trillion dollars while you're paying interest out the wazoo, I think it's safe to say that feels like a scam. Yes, it's exactly what it is. But wouldn't it be great if you could keep more of your money instead of helping a bank slap their name on yet another big functionalist postmodern skyscraper? Well, turns out there are mortgage options that help you keep more of your money and, like I said, save potentially hundreds of thousands of dollars in interest.

But even still, people are choosing the route that costs them more and makes banks rich. So let's crunch the numbers so you can see the difference for yourself and just how much you can save on your mortgage. Let's say you get a $300,000 mortgage, which is pretty in line with the average US mortgage of $330,000. And let's start by looking at the mortgage most people get, the conventional 30-year fixed rate mortgage.

And we'll assume an interest rate of 7%. I'm going to punch all this into the mortgage payoff calculator at ramseysolutions.com. I'll drop a link in the description so you can check it out for yourself. So our loan amount is $300,000. Date of first payment, let's say it was the first of the year.

Loan length, 30 years. Interest rate, 7%. You can see here it's going to give me the principal and interest, $1,995.91. But how much interest are we paying over those 30 years? Let's find out. Oh, boy. So you can see here it says new total interest, $418,000.

And here's why you're paying a metric butt-ton of interest. For this $300,000 mortgage, you'd have a payment of about $2,000 a month. And remember amortization, where you pay more interest up front? Well, that means that in the first year, out of that $2,000 monthly payment, less than $250 went to actually paying down the house, went to the principal. The other $1,750 is all interest, baby, making the lenders more rich. That's almost 90% of your payment that's building the bank's wealth instead of your wealth. In

In fact, it would take you 20 years before you even have a thousand bucks of that payment going toward the principal balance. That's insane. I mean, think about this. $420,000 in interest. That's a whole other house. The original loan amount was only $300,000. So you're paying over double in interest. And I don't know about you, but if I'm paying for two Crunchwrap Supremes, I expect to get two Crunchwrap Supremes. Or is it Crunchwraps Supreme? Like AirPods Pro? Either way, paying more in interest than the original amount of the loan is asinine.

Yeah, I just went full Shapiro. I'm not scared. All right, so surely there's a better option than that 30-year mortgage disaster, right? Well, enter the 15-year mortgage. It's like the 30 years cooler, more fiscally responsible cousin. And we're going to use the same example here. $300,000 mortgage, 7% interest rate, but this time with a 15-year term.

And bonus side note for you, I'm being generous here because the 15 year loan almost always comes with a lower interest rate than the 30, which would save you even more money. But for apples to apples, we'll keep it all honey crisp, okay? All right, so I'm gonna go back, edit the original loan to 15 years, and you'll notice my payment goes up to about 2,700 bucks. But let's see how much interest I end up paying.

$185,000. That's pretty wild. Remember, the 30-year had $418,000 in interest. That's over $230,000 in savings compared to the 30-year. Imagine what you could do with $230,000. You could buy two Cybertrucks to look doubly stupid.

And this seems like a no-brainer on paper, right? Well, here's where the rubber meets the road. Because the time you have to pay back the loan is shorter, your monthly payment goes from $2,000 to $2,700, a $700 increase. And this is where most people go, no thanks, George, I'll take the cheaper option. But just zoom out a little bit here. With a 15-year mortgage, it won't take two decades of mortgage payments to start seeing real progress on that principal. In fact, in the very first year, $1,000 of your payment goes to principal. And

And if you remember from our last example, it took 20 years to get to that point. That's like a wealth time machine. Sign me up. Are you telling me that you built a time machine out of a DeLorean? Think of it this way. You're paying a little more now, but you're saving a lot more later. So knowing all that, why do people still choose a 30-year? Well, here's what they tell me as they call into the Ramsey Show. Well, George, I like having that wiggle room with a 30-year, with a little smaller payment. Or, I can't afford the payment on a 15-year. Well, listen, the truth is that affording a 15-year mortgage...

takes time and discipline. And if you're fiddling around with consumer debt, like 700 bucks on a car loan, credit cards, you still have student loans sitting around, then yeah, it's going to be impossible to afford a 15-year mortgage. But if you focus, get that debt out of your life, all of a sudden you have more room in your budget. And you may need to look at a less expensive house or wait a little bit longer to save up a bigger down payment in order to afford a 15-year mortgage. But wouldn't that be worth saving hundreds of thousands of dollars? I

Well, in just a second, I'm going to show you what an extra payment or two could do to save you even more interest and a whole lot of time. And as you know, time is money. So if you're looking to save time and protect yourself online, check out Delete Me. They're a sponsor of today's episode, and they do the tedious work for you by finding and removing your personal data from dirty, no-good data broker sites that sell your info for a profit.

Gross. What does that mean for you? It means less robocalls, less spam texts, and more peace of mind. And they'll even send you a detailed report of exactly what they've done. And they do it all year long in the background for you for a very low price. So far, they've saved me 66 hours. And to be honest, a lot of potential headaches. So if you want to keep your personal data...

personal, go to joindeleteeme.com slash george and you'll get 20% off any of their plans or click the link in the description below. Also, we got to talk about something else here. I can't believe you. Yeah, you, the one behind the screen. You're still overpaying for your phone plan because with Tello, another sponsor of today's video, you can get the same great coverage as the big guys at a fraction of the cost. You see, Tello piggybacks off of T-Mobile's towers, so you get great reliability without a great big price tag.

And Tello's plans start as low as five bucks, up to 25 bucks a month for the unlimited everything plan. Plus you can adjust your plan as needed and get started in minutes from the comfort of your couch. And right now you can get five bucks off your first month of the unlimited everything plan by going to tello.com/george or just click the link in the description below. All right, let's keep saving you money on that mortgage. Let's say you've already made the brilliant decision to go with a 15 year mortgage.

Chef's kiss. And let's say once a year, you throw in the pot an extra mortgage payment of $2,700. Just that one little extra payment once a year that you could probably afford by canceling the Peloton subscription you haven't used since 2022. What does that do for you? First, you save about $25,000 in interest over the life of the loan. Second, you shave off a whole year and 10 months from the payoff time. That means you'll own your home outright in just 13 years and one month. Guaranteed.

This isn't just an extra payment. Think about this. It's giving you time and money back in your pocket because of those interest savings to invest in your future. Okay, let's get even crazier. What if you could swing that extra payment every quarter? You throw in an extra payment of $2,700 every three months. That's four extra payments a year. And what's the payoff?

Well, first, you save a whopping $72,000 in interest over the life of the loan. That's enough to see Wicked over 250 times on Broadway. Second, you cut five years and four months off of your payoff time. That means you own your home outright in under 10 years. Now, if you started this plan at age 30, that means you'd be mortgage-free by 40.

And then, well, that's extra cash to invest, travel, or finally buy that backyard pizza oven you've been dreaming about. Just think of the dinner parties. So the bottom line here, you work too freaking hard to stay broke and give all of your money to banks for the next 30 years. And that's why I make videos like this. I wanna see you win. I wanna see you have that freedom and flexibility. And when you're not paying an extra 200 grand in interest, then you can put that money to use building up a retirement,

And some of you out there might be going, well, I don't have a 7% mortgage. I have a 3% mortgage. Why would I ever pay that off? And to that, I say, get up off your assumptions, okay? You're assuming there's a 100% guarantee that you're going to make a big spread on this. The only guarantee here involves paying off your house early. That's a guaranteed return. And it's not just about the math or crushing your mortgage early because George said so. It's about creating a future where your money works for you, not the other way around.

And that margin, the freedom, the peace of mind, there's no calculator for that. I can't show you that on paper, but I can tell you it feels amazing. And look, I get trash in the comment section all the time talking about how no one can afford a 15-year mortgage and how unreasonable it is. But to me, what's unreasonable is paying more in interest to the bank than the cost of my own house. Boom, mic drop. So if you're watching this and you have a 30-year mortgage, you might be realizing...

You thought you were comforted by the low payment teddy bear, but in reality, you're face to face with a grizzly bear and your hot girl walk and all you have to defend yourself is your Lulu's and a Stanley. Good luck. So if that's you, here's your next step. First, check out our mortgage payoff calculator. I will drop a link in the description below. And here's what I want you to do. See how much interest you'll save and how quickly you can pay off your mortgage by making extra payments. It's quick.

It's free and it is eye-opening. And whether you're looking to buy or sell one day, soon, someday, or if you're just interested in how to get started and do this all the right way, be sure to check out the Ramsey Real Estate Homebase. On that page, you're going to find guides, tools, resources that will help you walk through saving up a down payment, buying a house, selling a house, and even more. Plus, you can get info on investing and market trends or even connect with a real estate agent or mortgage pro that I trust. I'm going to drop a link to that in the description as well so you can check it out.

And if you're really fired up after watching this, why not make a goal of paying off your house in the next 10 years or less? And if you think it sounds crazy, I'm going to show you why you're crazy. Keep watching this next video to learn how to do that or click the link in the description below. And if you like learning how to save hundreds of thousands in this video, hit the like and subscribe button and share this with literally everyone. Thanks for watching. We'll see you next time.