The Power of 5.31% and 20 Years
There are many 'hacks' we use when communicating powerful concepts to borrowers to help them understand compound interest, etc. An old one is the power of 5.31% and 20 years.
Why 5.31%? and 20 Years?
This is the interest rate on a 30 year fixed, where you pay back 100% of whatever you borrow as interest.
Example: You borrow $400,000 at 5.31% interest. How much will you pay back? You'll pay back $800,533. So not perfect, but the closest we could get when explaining this to client. On top of that you'll still owe $200,000 after 20 years, not after 15 years as many think.
When would you use this? When talking about mortgage acceleration, this is a cool concept to have in your back pocket. Maybe you are showing the CMG product, or talking about debt acceleration or early mortgage payoffs for retirement, or EPR (effective percentage rate) as any rate above 5.31% and you are paying back more in interest than you actually borrow.
$400,000 borrowed over 30 years at 5.31% has another key thing to remember, it usually takes about 20-21 years to pay off the first half of the amount borrowed.
Ending Balance of Debt after 10 Years: $328,367
Ending Balance of Debt after 20 Years: $206,668 - the half way repayment point
Ending Balance of Debt after 30 Years: $0
I've shared our spreadsheet that we use for simple examples like this, download and try it for yourself.