Finance Articles

Create Wealth by Reducing Your Monthly Mortgage Payment!

So that folks can cut down the time that it takes them to pay off their loan and reduce the total amount of interest handed over over that period, banks and financial advisors recommend that borrowers pay extra each month.

Boiled down, a $200,000 at a rate of 5% would cost about $1074 per month over 30 years. Over 30 years, you would actually fork out $1074 x 360 (months), which is $386,640. That's $186,640 in interest!

You could cut 10 years off your mortgage payment period if you could simply hand over your typical mortgage amount plus an additional $246 each month. 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 cough up more each month� I want to cough up less each month like the title of the article says. Even though I build up forking 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.

So why do financial advisors and bankers preach what they preach. 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. Contrary to popular belief, just because you coughed up more toward your mortgage already does not mean that the bank will not target you. Homeowners are actually safer from foreclosures when they OWE MORE money to the bank.When homeowners OWE MORE to the bank, they actually make themselves less of a target and are much safer.

The Hilton Hotel empire is probably the best example of this. 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, 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.

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 out more are targeted first by the banks. 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 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 expense 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.

So, in our example, how does the time value of money affect everything?

You can�t just take the 30 year mortgage and subtract the interest that was saved. To truly determine the best choice, you need to calculate the "Present Value" of every mortgage option.

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.

The two repayment schemes are exactly 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 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 much more now than it will be in 20 years.

There are some good arguments for paying off your mortgage faster like building your equity. 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, I want to dispel a myth that many people have about the wealthy. Most unwealthy people believe that wealthy people don�t have mortgages and that they own their homes 100%. 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 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 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 cut your monthly expense while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.

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

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