Reduce Your Monthly Mortgage Payment And Create Wealth At The Same Time!

By Author: Ed Brancheau
Total Articles: 9
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So that the public can cut down the time that it takes them to pay off their loan and reduce the total amount of interest forked over over that period, banks and financial advisors recommend that borrowers fork out extra every month.

Borrowing $200,000 over thirty years, for instance, with a 5% APR would create a monthly charge of about $1074. Over the next 30 years, you will actually fork out an additional $186,640 in interest for a grand total of $386,640!

Now, the reason that banks and financial advisors tell you to pay more is that because if you could pay an extra $246 a month with a total of $1320 going toward your mortgage each month then you would cut 10 years off your mortgage payment period. You would save $69,756 over the course of the loan and reduce your total payments to $316,664.

Of course, the title of this article is not "Why You Should Pay More Every Month" and it is about actually forking out less every month. So, now I am going to show you why forking out extra every month, while better than making regular payments, is not the best way to pay off your house and actually make money. 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. It�s pretty simple when talking about the banks. It�s less risky to them and they make a lot more money by lending the money to others when you pay your mortgage early 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 people that have handed over a lot 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 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, 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 the banks first target those that have paid 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 more when they were younger and that it is now worth less. Using the mortgage example above, in thirty years time, the last expense of $1074 will only be worth about $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 cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. Instead, you must calculate the "Present Value" of every mortgage option to determine which is best.

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.

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.

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. 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?

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 the true value of that extra $246 a month that you're giving them now is much greater now than it will be in the future.

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 paying 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 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 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 cut your monthly expense while at the same time build your wealth then please contact me.