Pay Less Mortgage Interest – A Good Investment?

After all the programs available to minimize your current mortgage, there is only one way to pay less mortgage interest: apply additional money towards principal. The bottom line is that you must reduce the principal loan balance if you want to pay less in associated interest charges.

As you know, the interest charged on a mortgage is front-end loaded. This means the bank receives the highest percentage interest on the largest balance in the beginning of the loan while it receives the lowest percentage interest on the smallest loan balance toward the end of the loan.

I am not sure how the lending institutions have been able to advertise an interest rate of say 6% when the real cost to borrow money secured against your property is more – much more. If you look at an amortization schedule for a $ 200K loan at a 6% fixed rate for 30 years, you see that the monthly payment is $ 1199.10. In one month, the interest payment is $ 1000 and the principal payment is $ 199.10. In this example, over 83% of the first payment goes toward interest! It is not until month 222 (18.5 years), that 50% the payment goes toward interest and 50% goes toward principal. It is not until month 348 (29 years), that 6% of the payment goes toward interest. Check it out for yourself. Is this mortgage really a 6% loan? Yes! Can you believe it? The total repayment for this loan is $ 431,677 … $ 231,677 in interest or 115% of the loan. I will ask again. Is this a 6% loan? Of course it is. It is the way compound interest is calculated. Remember what Einstein said: "The most powerful force in the universe is compound interest."

Zero Risk Investing –

There are two ways to raise your net worth: increase assets and / or decrease liabilities. It is much easier to decrease your liabilities than it is to increase your assets. First of all, you take out the middle-man when you decrease your liabilities. You can go directly to the source and eliminate it. When you increase your assets through the stock market or any other investment vehicle, there is usually a middle-man. Somebody is going to get paid to increase your assets and, most importantly, there is risk. All I want to point out is that there is some level of risk associated with increasing your assets. There is no, zero, zilch risk when you decrease your liabilities. There is no guessing, no hopping, and no praying. You know the exact return on investment going in.

For example, let us say in month two of your loan, that you decide to decrease your mortgage liability. You pay the normal $ 1199.10 plus an additional $ 2056.81 which you apply to principal only. This amount represents the next 10 months of principal payments. So, after two months you have made 12 months of principal payments. Take a closer look at what just happened. With this one extra chunk, you have eliminated $ 9934.19 of interest charges that you no longer have to pay the bank. You invested $ 2056.81 and saved $ 9934.19 over the life of the loan. There is truth in what you learned as a child: a penny saved is a penny earned. I am not exactly sure what that translates to in terms of return on investment but it is pretty close to 483%. Also, in month three, more of your normal payment will be applied toward principal.

Risk Investing –

Should you invest while paying off your mortgage? Let us do some basic math with no tax consequences.

Scenario # 1:

Let us assume that you pay your mortgage as scheduled for the next 30 years and you were able to invest $ 250 per month. If you achieved a 10% annualized rate of return for 30 years, this investment would be worth $ 565,122 plus your home free and clear.

Scenario # 2:

Let us assume that you use the same $ 250 a little differently and you eliminate your mortgage after 13 years. The fact is that once the mortgage is paid off, you can invest at a faster pace to achieve your financial goals. Let us take that old mortgage payment of $ 1199.10 plus the $ 250 and invest it for 17 years in the same vehicle achieving annualized returns of 10%. This investment would be worth $ 771,302 plus your home free and clear. This is a difference of over $ 206K in 30 years. Which pile do you prefer?

Personal Circumstances Dictate –

Yes, pay off credit cards and other high interest debt. Yes, continue to invest in the college fund, insurance products, qualified plans, real estate or any other vehicle that involves risk if it feels right for you and your strategy limits exposure and reductions taxes upon retirement. I am a huge fan of equity investing … do not get me wrong. The strategy to pay less mortgage interest is just one part of a well-balanced plan to diversify your portfolio on your way to increased wealth.

Source by Troy Margoglio