The Astonishing Power of Compounding & How to Use it to Make Smart Real Estate Decisions

A Tale of Three Financial Choices

Imagine you’re given three options for accumulating wealth. Which one would you choose?

1. Option A: Receive $1,000,000 every day for the rest of your life.
2. Option B: Receive $1 billion today, invested at a 10% annual return.
3. Option C: Start with 1 cent today, but it grows by 3% every week.

At first glance, the idea of $1,000,000 per day (Option A) or $1 billion upfront (Option B) sounds unbeatable. But how does Option C, the humble penny growing at 3% weekly, stack up over time?

Here’s a breakdown of what each option would be worth after 1, 5, 10, 15, and 20 years:

Year	Option A	Option B	Option C
1	$365,000,000	$1,100,000,000	$0.0465
5	$1,825,000,000	$1,610,510,000	$21.76
10	$3,650,000,000	$2,593,742,460	$47,354.02
15	$5,475,000,000	$4,177,248,140	$103,047,024
20	$7,300,000,000	$6,727,499,950	$224,240,330,600

The Surprising Outcome

While $1,000,000 per day and a $1 billion lump sum are both impressive, the power of compounding at 3% weekly (Option C) results in mind-boggling growth. By the end of 20 years, the initial penny has grown to over $224 billion! This exponential growth highlights how even a small amount can snowball into a fortune with frequent and consistent compounding.

Transition to Real-World Application: The True Cost of a Mortgage

This extraordinary power of compounding isn’t just a mathematical curiosity—it has real-world implications, particularly when it comes to something as common as a mortgage.

When you take out a mortgage, you’re not just borrowing money; you’re signing up to pay back that loan over a long period, with interest. A typical 30-year mortgage at an interest rate of, say, 6% might seem reasonable. However, over 30 years, the interest you pay can amount to nearly as much, if not more, than the principal you initially borrowed, and the total cost of the mortgage over its term length can be more than double the initial balance.

To illustrate this, let’s consider a $500,000 mortgage with two different interest rates—6% and 5%. Here’s how the numbers break down:

Interest Rate	Total Principal Paid	Total Interest Paid	Total Cost
6%	$500,000	$579,190.95	$1,079,190.95
5%	$500,000	$466,278.92	$966,278.92

As you can see, a 1% difference in interest rates leads to a substantial difference in the total interest paid over 30 years. The 6% interest rate results in paying nearly $580,000 in interest, while the 5% rate saves you over $110,000 in interest payments over the life of the loan.

The Impact of a 3% Commission on Home Sales

Now, let’s turn our attention to the cost of selling your home. Traditionally, real estate agents charge a 3% commission on the sale price of your home. This might not seem like much at first, but when you factor in the compounding effect over the life of a mortgage, it can add up to a significant amount.

Imagine selling a home for $625,000 and paying a 3% commission. What if, instead of paying that commission, you reduce the price of the house by 3%, which also reduces the downpayment accordingly (assuming a 20% downpayment)? Here’s how the total principal paid and interest paid over the 30-year term on a 5% loan would change:

Scenario	Total Principal Paid	Total Interest Paid	Total Cost (Principal + Interest)
Original Price, 5% Loan	$500,000	$466,278.92	$966,278.92
Reduced Price by 3%, 5% Loan	$485,000	$452,290.55	$937,290.55
Additional Savings			$43,988.37

Total Savings:

By reducing the home price by 3%, the buyer saves:

• $15,000 on the principal
• $13,988.37 on interest
• $3,750 on the downpayment
• $11,250 on property taxes (assuming a 2% property tax rate over 30 years)

This adds up to a total savings of approximately $43,988.37 over the life of the loan.

Conclusion:

By reducing the home's price by even a couple of percent, the buyer achieves significant savings not only on the mortgage principal and interest but also on the downpayment and property taxes. The total savings over 30 years amount to tens of thousands of dollars, demonstrating the powerful impact of negotiating a lower purchase price, especially when compounded with a lower interest rate and ongoing tax obligations.

It is crucial to understand the power of compounding and its impact on everyday financial decisions. Whether you’re choosing between seemingly absurd financial options, calculating the actual cost of a mortgage, or considering the long-term implications of a real estate commission, compounding plays a significant role. By making informed decisions, you can leverage the power of compounding to your advantage, potentially saving—or earning—substantial amounts over time.