Title:
How To Manage
Your Mortgage Payment
Word Count:
482
Summary:
Normally, banks
and financial consultant will advice you to pay extra money into your mortgage.
With this method, it will help you cut down the huge interest amount and reduce
the period over which you pay back the loan.
For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly
repayments would be around $1074. Over 30 years, you would actually pay $1074 x
360 (months), which is $386 640. That's $186 640 in interest! What you have to
do is to find an...
Keywords:
small business
loan,loan,loans,student loan,consolidation
Article Body:
Normally, banks
and financial consultant will advice you to pay extra money into your mortgage.
With this method, it will help you cut down the huge interest amount and reduce
the period over which you pay back the loan.
For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly
repayments would be around $1074. Over 30 years, you would actually pay $1074 x
360 (months), which is $386 640. That's $186 640 in interest! What you have to
do is to find an extra $246 a month, and pay $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. Moreover, your total payments would be $316 664, saving $69 756!
The flaw in this technique is that it ignores the time value of money. Everyone
knows that money is worth less now than it was when they were younger. If you
take that $1074 mortgage repayment, for instance, in 30 years time, when the
last payment 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. You cannot simply subtract the mortgage interest amount for a 20 year
mortgage from the interest on a 30 year mortgage. What you need to do is
calculate the Present Value of each mortgage.
First method of repayment:
The Present Value of a 30 year mortgage with repayments of $1074 at a 5%
interest rate is $200 066.
Second method of repayment:
The Present Value of a 20 year mortgage with repayments of $1320 at a 5%
interest rate is $200 066.
The two repayment schemes are exactly equal. The $69 756 'saving' 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.
Let’s think this way. What if you took that $246 a month and invested it in,
for example, mutual funds? If you could get a return of 10% p.a., after 20
years you would have $186 804. With inflation at 3%, that would be worth $102
597 in today's money.
Why would the banks recommend that you pay off your mortgage quickly? Surely
the longer the income stream lasts, the better? The banks love being able to
prove that their recommendations will 'save you money'. But in reality, the
banks do understand the time value of money. They know the true value of that
extra $246 a month that you're giving them now, not in the future. And the
shorter the time you take to repay the mortgage, the lower their risk, and the
sooner their money comes back to them to be loaned out again.
There are some arguments for paying your mortgage back quickly - for one thing,
the quicker you pay, the quicker your equity grows. But you should understand
that every dollar you give the bank now is a dollar that you can't invest. You
then miss opportunity to invest and a return 10 percent or even 15 percent!