Reduce Your Monthly Mortgage Payment AND Build Wealth At The Same Time Article

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Reduce Your Monthly Mortgage Payment AND Build Wealth at the Same Time

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. What a mistake!

Author: Ed Brancheau

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Financial advisors and banks have been telling the masses for years that they should fork over extra money every month toward their mortgage in order to reduce the time period for paying off the loan and to cut down on the interest handed over.

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 a (month), which is $386,640. That's $186,640 in interest!

If you could find an extra $246 a month, and fork out $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. You would save $69,756 over the course of the loan and reduce your total payments to $316,664.

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. Now I am to show you why paying a lot more money toward your mortgage is not the best move that you can make. 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.

However, before we get into the time value of money, let me first explain why the banks and financial advisors preach what they do. It’s pretty simple when talking about the banks. It’s less risky to them and they make more money by lending the money to others when you pay your mortgage early 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 coughed up more money. 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. 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, 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.)

Financial advisors often tell their clients to go this route and I have no idea why. They know that the banks first target those that have forked out much more. 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 much 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 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.

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. To truly determine the best choice, you need to calculate the "Present Value" of each mortgage option.

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.

The two repayment schemes are exactly 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 instance, mutual funds?

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. Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better, right?

Banks love to prove that they will "save you money" and make it seem like they are doing it only for your benefit. 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 a lot 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.

Giving your money to the bank to avoid forking out 5% interest means that you can't use that money to earn 10% or 12% or 15% somewhere else.

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 lowering 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.

About Author

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

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Reduce Your Monthly Mortgage Payment AND Build Wealth at the Same Time