Pay Your Mortgage As Gradually As You Wish!

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.

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 hand over $1074 x 360 (months), which is $386,640. That's $186,640 in interest!

If you could find an extra $246 a month, and pay $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!

OK, so maybe now the little voice in your head is saying something like, "I don�t want to pay more each month� I want to pay less each month like the title of the article says. Even though I build up paying much more toward your mortgage as a great option, I am going to show you why it is actually not a good option. The problem with this thinking 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. On top of that, banks always pick the homeowners that have PAID MORE money toward their mortgage when they decide who to foreclose on because it exposes them to less risk. This is completely the opposite of the belief that the bank won�t target the masses that have handed over more money. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money.

The Hilton Hotel empire is probably the best example of this. During the Great Depression, when homes were being foreclosed on left and right, the Hiltons did not have one property foreclosed on even though they fell behind in the payments several times. Basically, since they owed so much money (and still do since they never pay off their properties) they made sure that the banks would not target them.

Regarding financial advisors, I really have no idea why they tell their clients to go this route. They know that those that have forked out a lot 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.

Just about every single person knows that money was worth more when they were younger because of inflation. Using the mortgage example above, in thirty years time, the last amount 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 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.

In truth, that $246 per month adds up to $59,040 over 20 years so you are not really saving $69,756 but rather about $10,000.

On the other hand, what would happen if you took that same $246 each 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.

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 a lot more quickly?

The banks love being able to prove (and make it seem like they are only doing it for your benefit) that their recommendations will "save you money". But in reality, the banks really understand the time value of money. 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 out, 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.

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, many people have a misconception about the wealthy that I want to dispel. 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 lowering your monthly expense 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 expense while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.

Article Source: http://www.christiannotepad.com

Ed Brancheau is a mortgage financing virtuoso who can teach you to decrease your payments, pay off your mortgage faster and build wealth. Call him at 310-770-2369 for more info.