Home | Real Estate
So that folks can cut down the time that it takes them to pay off their loan and reduce the total amount of interest coughed up over that period, banks and financial advisors recommend that borrowers fork over extra each month. For example, if you borrow $200,000 over 30 years at a rate of 5%, your monthly payments would be around $1074. Over 30 years, you would actually fork out $1074 x 360 (months), which is $386,640. That's $186,640 in interest! If you could find an extra $246 a month, and cough up $1320 a month into the mortgage, you'd cut 10 years off the repayment period - the loan would be fully paid in only 20 years. Moreover, your total payments would be $316,664, saving $69,756! Now, you might be saying something to yourself right now like "But Ed, I want to cut my payments like the title of the article says� I don�t want to fork over more every month!" Even though I build up forking out a lot more toward your mortgage as a great option, I am going to show you why it is actually not a good option. The major flaw with what the banks and financial advisors are preaching is that it does not take into account the "time value" of money. That said, let me first explain why financial advisors and the banks preach what they do before we get into the time value of money. With the banks, it�s pretty simple� your paying your mortgage faster means less risk to them and it gives the opportunity to lend the money to someone else. In addition, when banks decide what people to target for foreclosures, they always pick the people that have PAID MORE toward their mortgage because they expose themselves to less risk. This is completely the opposite of the belief that the bank won�t target folks that have handed over much more money. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money. The prime example of this is the Hilton Hotel empire. The Hiltons did not have one property foreclosed on as others were being foreclosed on left and right even though they fell behind on their payments several times. Basically, they made sure that the banks would not target them since they owed so much money (and still do since they never pay off their properties.) I really have no idea why, when it comes to financial advisors, that they tell their clients to go this route. They know that the banks first target those that have handed over more. Finally, having their clients pay off their mortgage actually costs their clients and themselves (because they get paid by making their clients money) a ton of lost profit because of the time value of money. Everyone knows that money was worth more when they were younger and that it is now worth less. Using the mortgage example above, in thirty years time, the last expense of $1074 will only be worth about $437 in today�s money. Whether it�s one, ten or one hundred years from now, a dollar today will always be worth more. How does the time value of money affect our example? You can�t just take the 30 year mortgage and subtract the interest that was saved. What you need to do is calculate the Present Value of every mortgage. The Present Value of a 30 year mortgage fixed at a 5% interest rate and with payments of $1074 is $200,066. The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200,066. The Present Value of a 20 year mortgage fixed at a 5% interest rate and with payments of $1320 is $200,066. Both are equal. The $69,756 "savings" in the interest rate is really just the effect of adding the extra $246 a month into the repayments - in fact, that $246 a month adds up to $59,040 over 20 years. On the other hand, what would happen if you took that same $246 every month and invested it elsewhere? Averaging a 10% rate of return, you would have $186,804 (Note: an S&P 500 Index Fund would be an excellent choice as the S&P 500 has average a 10.83% rate of return over the last 50 years.) With inflation at 3%, that would be worth $102,597 in today's money. Now let�s ask the question we asked once before to get even more answers. Surely, the longer the income stream lasts, the better, right? So why would the banks recommend that you pay off your mortgage much more quickly? "Our recommendation will save you money" is one thing that the banks love to prove and make it seem like they are only doing it for your benefit. But in reality, the average Joe simply doesn�t understand the time value money as well as the banks do. The banks know that $246 today is worth a lot more now than it will be in 20 years. There are some arguments for paying your mortgage back quickly - for one thing, the quicker you fork over, the quicker your equity grows. However, you should fully understand that every dollar that you give the bank is a dollar that you cannot invest elsewhere. Why give up your right to have your money safely and conservatively make you 10-30% to save 5%. Doesn�t that sound pretty stupid? Finally, I want to dispel a myth that many people have about the wealthy. Most people believe that wealthy people own their homes completely and do not have mortgages. The fact of the matter is that most do not own their homes free and clear because they understand that their money can make them much more money in other investments rather than sitting in the walls of their homes. Bill Gates took out a mortgage for his new home. The Home Depot doesn�t own any of the land or buildings that they use. Why should you pay off your house? Of course the title of this article talks about actually decreasing your monthly charge while building wealth at the same time and I would love to show you how to do exactly that. If you would like to know how to reduce your monthly charge while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.
Article Source: http://www.financemanual.com
Ed Brancheau is a mortgage financing Whiz who can teach you to lower your payments, pay off your mortgage much quicker and build wealth. Call him at 310-770-2369 for more info.
Please Rate this Article
5 out of 54 out of 53 out of 52 out of 51 out of 5
Not yet Rated
