Pay Your Mortgage As Slowly As You Wish!

By Author: Ed Brancheau
Total Articles: 9
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For years, banks and financial advisors have been recommending that you cough up extra cash into your mortgage to cut down the huge interest amount and reduce the period over which you pay back the loan.

Borrowing $200,000 over thirty years, for example, with a 5% APR would create a monthly expense of about $1074. Over the next 30 years, you will actually fork over an additional $186,640 in interest for a grand total of $386,640!

Now, the reason that banks and financial advisors tell you to hand over more is that because if you could hand over an extra $246 a month with a total of $1320 going toward your mortgage each month then you would cut 10 years off your mortgage payment period. Moreover, your total payments would be $316,664, saving $69,756!

OK, so maybe now the little voice in your head is saying something like, "I don�t want to fork out more each month� I want to fork out less each month like the title of the article says. Even though I build up handing over more toward your mortgage as a great option, I am going to show you why it is actually not a good option. The flaw in this technique ...
... is that it ignores 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. Paying off your mortgae faster means much less risk to the bank and it gives them the opportunity to lend the money to others. Because the homeowner that has PAID MORE money toward their mortgage is less risky for the bank, the bank prefers to target them first. This is contrary to the beliefs of most people that tend to think that because they paid much more, the bank won�t target them. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money.

The prime example of this is the Hilton Hotel empire. When homes were being foreclosed on left and right during the great depression, the Hiltons, even though they fell behind on their payments several times, did not have one property foreclosed on. 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 those that have forked over more are targeted first by the banks. And because of the time value of money, they are also costing their clients and themselves (since they get paid based on what they make their clients) a ton of lost profit.

Everyone knows that money is worth less now than it was when they were younger. If you take that $1074 mortgage repayment, for instance, in 30 years time, when the last charge is due, it would only be worth $437 in today's money.

A dollar now is always better than a dollar in a year's time, or in 10 year's time.

How does the time value of money affect our example?

You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. What you need to do is calculate the Present Value of each mortgage.

The Present Value of a 30 year mortgage with repayments of $1074 at a 5% interest rate 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.

What if you took that $246 a month and invested it in, for example, mutual funds?

If you could get an average return of 10%, after 20 years you would have $186,804 (Note: the S&P 500 has averaged 10.83% over the last 50 years and would make an S&P 500 Index Fund a safe yet powerful choice.) With inflation at 3%, that would be worth $102,597 in today's money.

To get even more answers, let�s ask the question we asked before. Surely, the longer the income stream lasts, the better, right? So why would the banks recommend that you pay off your mortgage 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 banks really understand the time value of money. The banks know the true value of that extra $246 a month that you're giving them now is much greater now than it will be in the future.

There are some arguments for paying your mortgage back quickly - for one thing, the quicker you hand over, the quicker your equity grows. But you should understand that every dollar you give the bank now is a dollar that you can't invest.

I don�t know about you, but I think that its pretty stupid to worry about handing over much more overall interest when that money can easily make you two to three times as much money while still paying off your house.

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 a lot 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 cut your monthly charge while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.