How to Calculate Debt Paydown on Rental Properties

Debt Paydown

 Monthly Mortgage Payment \$1,270.32 - Monthly Interest Paid - \$1,101.69 Monthly Principal Paid = \$168.63 × 12 Months × 12 Annual Debt Paydown = \$2,024

Let's walk through calculating Debt Paydown for Typical 25% Down Payment Gainesville, Florida Rental Property.

First, we'll need to determine how much interest is being paid with the current month's mortgage payment.

Monthly Mortgage Interest

To determine how much interest is being paid, we need to take the current mortgage balance and multiply it by the annual interest rate divided by 12 months.

Both the mortgage balance and the mortgage interest rate are easy since they both are primary inputs that do not require any real calculation.

Monthly Mortgage Interest

 Current Mortgage Balance \$195,856.50 × Annual Mortgage Interest Rate × 6.75% ÷ 12 Months ÷ 12 Interest Paid = \$1,101.69

Once we know how much of the monthly mortgage payment is going toward interest, we can subtract that from the monthly mortgage payment to determine what portion is being used to pay down the loan in that month.

Monthly Principal Paid

 Monthly Mortgage Payment \$1,270.32 - Monthly Interest Paid - \$1,101.69 Monthly Principal Paid = \$168.63

Because the amount paid in principal each month tends to increase on an amortizing loan, this is a conservatively low estimate.

Debt Paydown

 Monthly Mortgage Payment \$1,270.32 - Monthly Interest Paid - \$1,101.69 Monthly Principal Paid = \$168.63 × 12 Months × 12 Annual Debt Paydown = \$2,024

IMPORTANT NOTE: With amortizing loans (like a 30-year fixed rate mortgage), each month you pay down the amount that is owed. If you owe less, that means that the amount of interest you owe changes each month; it goes down. That also means that the amount of principal is paid off in your fixed mortgage payment changes each month; it goes up. This calculation is a single month, but we will annualize it to estimate the debt paydown benefit. This is not exactly correct, but just an estimate.

In this example for Typical 25% Down Payment Gainesville, Florida Rental Property, we're estimating they're paying \$168.63 per month. So, if we multiply that by 12 it gives us an estimate of \$2,024 per year in debt paydown.