Pay Your Mortgage As Gradually As You Want!

Create Wealth by Cutting Your Monthly Mortgage Payment!

Financial advisors and banks have been telling folks for years that they should hand over extra money each month toward their mortgage in order to reduce the time period for paying off the loan and to cut down on the interest forked out.

For example, if you borrow $200,000 over 30 years at a rate of 5%, your monthly payments would be around $1074. Over the next 30 years, you will actually pay an additional $186,640 in interest for a grand total of $386,640!

You could cut 10 years off your mortgage payment period if you could simply cough up your typical mortgage charge plus an additional $246 each month. On top of that, you would reduce the total to $316,664 and save an incredible $69,756!

Now, you might be saying something to yourself right now like "But Ed, I want to reduce my payments like the title of the article says� I don�t want to fork over more every month!" Even though I build up handing over much 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.

However, before we get into the time value of money, let me first explain why the banks and financial advisors preach what they do. 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 forked over 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. 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.)

Regarding financial advisors, I really have no idea why they tell their clients to go this route. They know that those that have handed over more are targeted first by the banks. They also are costing their clients and themselves a ton of lost profit because of the time value of money which I will explain now.

Everyone knows that money was worth more when they were younger and that it is now worth less. 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.

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 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.

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.) That would be worth about $102,597 in today�s money with inflation hovering around 3%.

To get even more answers, let�s ask the question we asked before. Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better, right?

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 the fact of the matter is that the banks simply understand the time value of money better than the average Joe. The banks know that $246 today is worth 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 cough up, 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, many people have a misconception about the wealthy that I want to dispel. 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 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 payment 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 payment while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.

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