or years, mainstream banks
and financial advisors have You see, the flaw in this
been recommending that you technique is that it ignores the
pay extra cash into your mortgage time value of money.
account in order to cut down the
huge interest amount and reduce The banks, mortgage lenders and
the period over which you pay other financial types know that
back the loan. money is worth less now than it
was when they were younger. Take
For example, if you borrow that $1074 mortgage repayment for
$200,000 over 30 years at a rate instance, in 30 years time, when
of 5%, your monthly repayments the last payment is due, it would
would be around $1074. Over 30 only be worth $437 in today's
years, you would actually pay money (based on current inflation
$1074 x 360 (months), which is growth).
$386,640. That's a of $186,640 in
interest! A dollar now is always better
than a dollar in a year's time or
Now if you could find an extra in 10 years from now.
$246 a month, and pay $1320 a
month into your mortgage account, How does the time value of money
you would cut 10 years off the affect our example?
repayment period - the loan would
be fully paid in only 20 years You cannot simply subtract the
instead of 30 years. Moreover, mortgage interest amount for a 20
your total payments would be year mortgage from the interest
$316,664 -saving you $69,756! on a 30 year mortgage. What you
Looks like BIG savings for you need to do is calculate the
right? Not so fast though...keep Present Value of each mortgage.
reading.
The Present Value of a 30 year So why would the banks recommend
mortgage with repayments of $1074 that you pay off your mortgage
at a 5% interest rate is quickly? Surely the longer the
$200,066. income stream lasts, the better
right? - wrong.
The Present Value of a 20 year
mortgage with repayments of $1320 Banks love being able to prove
at a 5% interest rate is that their recommendations will
$200,066. 'save you money'. But in reality,
and as I stated earlier, the
Thus, the two repayment plans are banks have a very good
exactly equal over time. understanding of the time value
of money. They know the true
Much of this $69,756 'saving' on value of that extra $246 a month
the interest rate is really no that you're giving them now, and
more than the result of you not in the future. And the
paying the extra $246 a month. shorter the time you take to
That $246 a month for 20 years repay the mortgage, the lower
totals $59,040. their risk, and the sooner their
money comes back to them to be
What if you took that $246 a loaned out again.
month and invested it in, for
example, mutual funds? There are some arguments for
paying your mortgage back quickly
If you could get a return of 10% - for one thing, the quicker you
each year, after 20 years you pay, the quicker your equity
would have $186,804. With grows. But you should understand
inflation at 3%, that would be that every dollar you give the
worth $102,597 in today's money. bank now is a dollar that you
can't invest.
financial advisor pow-wow. This
Giving your money to the bank to meeting should focus on whether
avoid paying 5% interest means or not those extra mortgage
that you can't use that money to dollars can be invested to earn a
earn 10% or 12% or 15% interest more positive cash-flow for you
somewhere else. instead of your bank.
If you're currently following an Copyright 2005 KnowledgeTree.
accelerated payment plan, you may
want to have a family and/or
About the Author:
This article by C Raymond Merrick takes a look at the accelerated mortgage techniques that actually benefit the mortgage lenders more than the consumer. For more articles and information about hidden mortgage resources, secrets, strategies and tips, visit Mortgage HotLinkZ at http://mortgage.hotlinkz.net
Source: www.isnare.com
