| Doris Dobkins is the publisher of $mart Money New$. You can subscribe by
visiting her web site at
CreativeFinances.com |
If
you close on a new mortgage, your loan papers state the interest
rate you will be paying for your loan. But is that interest rate
really as good as it looks? Out of your monthly payment that you
faithfully make each month, do you know how much of that amount is
actually going towards interest?
During the signing of your loan
papers, you might have noticed a large sum being disclosed (about
three times the size of your mortgage) which indicates the amount of
interest and principal you would be paying over the life of your
loan?
For example, if you have a 30-year
fixed loan for $100,000, over 30 years, you would have paid
approximately $300,000 to your lender. Only 1/3 of that money is
actually what you borrowed. The majority of your hard earned money
is actually interest payments.
To verify this for yourself, take
your current monthly payment that you make to your lender,
(principal and interest only) and multiply it by 360 for a 30-year
loan and you'll see the total payments your lender would receive
over 30-years.
That huge sum of money in interest is
going to someone else. It is money that should be working for you
and building your wealth. Do you really want to work three decades to
give your lender such a large chunk of your hard earned money?
Here's another tidbit of information
that is even more important. How often do you move? In America, the
average person moves every 7 years. I don't know about you but when
most people move into a new house, they get a new mortgage and go
right back to payments where 90% of the amount is going towards
interest. If you are average, you'll probably never pay  off a house
in your lifetime unless you become aware of how money works. And one
of these days, it may be too late.
Think of it like this. If you have a
30-year fixed, $100,000 mortgage at 7% interest and you move after 5
years, you will still owe 94% of your original loan or $94,000. Of
the thousands of dollars you have paid over 5 years, you will only
have reduced the principal by $6,000 because most of your payment
for the first 5 years goes towards interest. After 10 years of
payments, (120 payments) you'd still owe about 86% of your mortgage
balance. It takes literally 20-25 years of mortgage payments just to
reach the 50% mark.
If you are one of those people who
are not prepaying a mortgage because it is your last tax shelter,
think about what you are really doing. You are paying a dollar of
interest to get back 28 cents in tax deductions (or whatever your
tax rate is). This is called "negative cash flow."
Another reason I hear for hanging
onto a mortgage is that people would rather use the money to invest
and get a greater return. First of all, this is not an apples to
apples comparison as one is a guaranteed rate of return and the
other is not. There's no guarantee with other investments like there
is with paying off a mortgage. It all boils down to risk. Yes, you
may come out ahead in some investments but they are not Guaranteed.
If your money were in the stock market right now, paying off your
mortgage would probably have given you a greater return than you are
getting right now.
So what is the solution? Pay extra on
your mortgage and get it paid off early! Even just one extra payment
a year will remove about 8 years from a 30-year loan.
Do you have a plan to be debt free?
No matter your income or expenses, it can be achievable for you.
Find out where you are now, identify where you want to be in 5 years
and make a plan to get there.
Start your debt-free plan today,
include your mortgage and build YOUR future wealth, not someone
else's.
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