For years, banks and financial advisers are recommending that the board extra money in your mortgage to reduce the huge amount of interest and reduce the period during which you pay the loan.
$ 200,000 loan over thirty years, for example, with a 5% APR create a monthly expenditure of about $ 1074. Over the next 30 years, which would make 360 payments (months) of $ 1074 for a grand total of $ 386,640. Thats $ 186,640 more than the original loan!
If I could find an extra $ 246 a month, and the bureau more than $ 1320 per month in mortgage, you cut off 10 years repayment period – the loan would be paid in full in just 20 years. Moreover, the total payment would be $ 316,664, saving $ 69,756!
OK, so maybe now the little voice in your head is saying something like, “I do not want to deliver every month, I want to give every month, as the title of the article said. Even more to build the delivery of your mortgage as a great choice, I will show why it’s really not a good option. The main fault with what the banks and financial advisers are preaching that it does not take into account the “time value of money.
However, before entering the time value of money, let me first explain why banks and financial advisers preach what they do. With banks, its easy to pay your mortgage faster means less risk and gives them the opportunity to give money to someone else. Because the house that has paid more money for your mortgage is less risky for the bank, the bank prefers the first goal. Contrary to popular belief, simply because you cough a lot more to your mortgage and the bank does not mean that you do not target. At present, the owners are actually safer when the executions must be more money.
The first example is the Hilton Hotel empire. The Hilton has not closed on a property that others were being closed to the left and right even though they fell behind in its payments on several occasions. Basically, they made sure that the banks were not targeted because they owe so much money (and still do, as not paying their property.)
I really have no idea why, when it comes to financial advisers, who say their clients to this route. They know that the first goal to which banks have to cough up more. And by the time value of money, there are the costs of their customers and themselves (because they are paid based on what they do their customers) a ton of profits.
Everyone knows that money is worth less now than it was when they were younger. Using the example above the mortgage, for thirty years, the last payment of $ 1074 is only worth about $ 437 in cash today.
A dollar today is always worth more than a dollar a year from now or 10 years from now or 100 years from now.
Thus, in our example, how the time value of money affects everything?
There can be only 30 years of the mortgage and subtract the interest that was saved. To really determine the best option, it is necessary to calculate the “present value” of each option on the mortgage.
The present value of 30 years with mortgage repayments of $ 1074 at 5% interest rate is $ 200,066.
The present value of 20 years with mortgage repayments of $ 1320 at 5% interest rate is $ 200,066. The present value of a mortgage 20 years fixed at 5% interest rate and payments of $ 1320 is $ 200,066.
Both are equal.
The $ 69,756 “savings” in the interest rate is actually the effect of adding the extra $ 246 a month in payments – in fact, that $ 246 per month is $ 59,040 over 20 years.
Now, what would happen, for example, if you had to $ 246 per month and invested in other parts of something safe and conservative as a mutual fund?
If you can get an average return of 10% after 20 years, would have $ 186,804 (Note: the S & P 500 has averaged 10.83% in the last 50 years and a S & P 500 a security fund yet powerful choice.) With inflation at 3%, which would be worth $ 102,597 in cash today.
For more answers, lets ask the question we asked earlier. Why encourage the banks to pay your mortgage quickly? Surely the revenue stream harder, better, right?
The banks love being able to demonstrate (and make it appear that they are only doing their benefit) that its recommendations “to save money.” But in reality, the average Joe just doesn’t understand the time value of money and the banks. Banks know that $ 246 today is worth more now than in 20 years.
There are some good reasons to pay your mortgage faster, as the construction of its equity. However, you must understand that every dollar you give the bank is a dollar that can not be invested elsewhere.
Give your money to the bank to avoid coughing up a 5% interest means that you can not use that money to earn 10% or 12% or 15% somewhere else.
Finally, many people have a misconception about the rich who want to dispel. Most people believe that the wealthy owners of their houses completely and have no mortgages. The fact is that most do not own their homes free and clear because they understand that their money can do a lot more money in other investments instead of sitting on the walls of their homes. Bill Gates had a mortgage for their new home. The Home Depot doesn’t own any land or buildings they use. Why should you pay for your house?
