the whole truth
An investment advisor tells us that one of the most frequent questions he gets is about paying more each month on a mortgage. The rationale is simple. Pay more than you have to...get the mortgage paid off sooner.
In theory, like much financial theory, it's obviously true. In a vacuum, it's perfectly true.
In practice, like much financial behavior, it's more of a fairy tale.
Here is the simple, complete truth. A mortgage is PART of a WHOLE financial picture. Like most things in life, success is created out of organizing and coordinating multiple elements in order to create synergy.
Think about your wardrobe. To create the best look, to can't simply take any shirt and expect it to match perfectly to any pair of trousers and any pair of shoes and any belt. You'd likely wind up looking like a bit of a nut. Finance is the same, yet most people have no idea how to coordinate their finances, nor what kind of dramatic long term impact that can have.
On the one hand, they do things like pay more to their mortgage each month, while on the other hand, they're carrying a credit card balance. In the finance industry, we call that "one foot on the gas and the other on the brake pedal". You can't get ahead if you're not maximizing every financial opportunity to your best ability.
Let's look at paying the house off early and what that means.
The simplest way to look at this for any adult who is responsible with their finances is this: Imagine if you could withdrawal $50 from a money-machine and use that $50 any way you wanted for the entire day and it would cost you 50 cents. At the end of the day, you'd have to deposit back to that machine, $50.50. Imagine if there was a second machine. If you put your $50 into that machine, it would return to you $51. It doesn't cost you anything to use that machine.
So here's the choice before you: 1) if you borrowed $50 from machine 1 at a cost of fifty cents, would you RUSH to immediately repay $50.50? OR, 2) would you take the $50 to machine 2, make $1, then return to machine 1 to repay the $50.50, thereby earning fifty cents on the money from machine 1? OR 3) would you put your $50 into machine 2 as many times as possible during the 1-day limit you had for using machine 1's money, then at the end of the day, return the original $50.50 to machine 1?
You see, if you took the original $50...which is NOT your money, you're only borrowing it at a cost, do you realize that if you took advantage of machine 2 and you did so 100 times during the day, you'd have doubled your money. (net 50cents from each transaction x100 = $50). Of course at the end of the day, you'd have to return the original $50 plus $1 reducing your net profit to $49. Still, you probably realize that in this scenario, there is a distinct advantage to using OPM (other peoples money), paying a modest interest rate on that borrowed money, and turning around and earning a higher interest return.
Now, let's put a logic spin on that. What if the $50 didn't come from any machine. It was YOUR MONEY. In this circumstance, you can simply go to machine 2, put your $50 in and get $51 back. You earn 100% of the $1 you just earned.
Final step. You have your choice. a) you can send and extra $50 to the bank this month, eliminating a 3% interest loan or b) you can take that $50, earn 3.1% or higher return on it and you take a small step toward improving your own financial position. This is known as financial efficiency. Paying off a debt with money that could potentially earn interest at a rate HIGHER than what you are paying off is INEFFICIENT.
Yet another spin. Which is more efficient? a) paying off a 3% loan, b) paying off a 18% loan or c) earning a 5% return? The EFFICIENT answer is to pay off an 18% loan. Yet every month, millions of well-intentioned Americans are struggling to pay off their mortgage early in order to "get ahead".
_______
If I were to GIVE you as much money as you wanted, how much would you take? There's a catch. I'm going to charge you interest. Now if I stopped right there, you might be thinking..."I can't afford the payment on a $1,000,000 loan, so even though I'd love to have a million bucks, that would be the fast path to bankruptcy.
But let's talk about the WHOLE picture. What if I'm charging you 1% interest. And your repayment term is 15 years. Is it reasonable to assume that you could put your money somewhere that it would earn MORE than 1% per year over the entire 15 year term? Of course!
In theory, like much financial theory, it's obviously true. In a vacuum, it's perfectly true.
In practice, like much financial behavior, it's more of a fairy tale.
Here is the simple, complete truth. A mortgage is PART of a WHOLE financial picture. Like most things in life, success is created out of organizing and coordinating multiple elements in order to create synergy.
Think about your wardrobe. To create the best look, to can't simply take any shirt and expect it to match perfectly to any pair of trousers and any pair of shoes and any belt. You'd likely wind up looking like a bit of a nut. Finance is the same, yet most people have no idea how to coordinate their finances, nor what kind of dramatic long term impact that can have.
On the one hand, they do things like pay more to their mortgage each month, while on the other hand, they're carrying a credit card balance. In the finance industry, we call that "one foot on the gas and the other on the brake pedal". You can't get ahead if you're not maximizing every financial opportunity to your best ability.
Let's look at paying the house off early and what that means.
The simplest way to look at this for any adult who is responsible with their finances is this: Imagine if you could withdrawal $50 from a money-machine and use that $50 any way you wanted for the entire day and it would cost you 50 cents. At the end of the day, you'd have to deposit back to that machine, $50.50. Imagine if there was a second machine. If you put your $50 into that machine, it would return to you $51. It doesn't cost you anything to use that machine.
So here's the choice before you: 1) if you borrowed $50 from machine 1 at a cost of fifty cents, would you RUSH to immediately repay $50.50? OR, 2) would you take the $50 to machine 2, make $1, then return to machine 1 to repay the $50.50, thereby earning fifty cents on the money from machine 1? OR 3) would you put your $50 into machine 2 as many times as possible during the 1-day limit you had for using machine 1's money, then at the end of the day, return the original $50.50 to machine 1?
You see, if you took the original $50...which is NOT your money, you're only borrowing it at a cost, do you realize that if you took advantage of machine 2 and you did so 100 times during the day, you'd have doubled your money. (net 50cents from each transaction x100 = $50). Of course at the end of the day, you'd have to return the original $50 plus $1 reducing your net profit to $49. Still, you probably realize that in this scenario, there is a distinct advantage to using OPM (other peoples money), paying a modest interest rate on that borrowed money, and turning around and earning a higher interest return.
Now, let's put a logic spin on that. What if the $50 didn't come from any machine. It was YOUR MONEY. In this circumstance, you can simply go to machine 2, put your $50 in and get $51 back. You earn 100% of the $1 you just earned.
Final step. You have your choice. a) you can send and extra $50 to the bank this month, eliminating a 3% interest loan or b) you can take that $50, earn 3.1% or higher return on it and you take a small step toward improving your own financial position. This is known as financial efficiency. Paying off a debt with money that could potentially earn interest at a rate HIGHER than what you are paying off is INEFFICIENT.
Yet another spin. Which is more efficient? a) paying off a 3% loan, b) paying off a 18% loan or c) earning a 5% return? The EFFICIENT answer is to pay off an 18% loan. Yet every month, millions of well-intentioned Americans are struggling to pay off their mortgage early in order to "get ahead".
_______
If I were to GIVE you as much money as you wanted, how much would you take? There's a catch. I'm going to charge you interest. Now if I stopped right there, you might be thinking..."I can't afford the payment on a $1,000,000 loan, so even though I'd love to have a million bucks, that would be the fast path to bankruptcy.
But let's talk about the WHOLE picture. What if I'm charging you 1% interest. And your repayment term is 15 years. Is it reasonable to assume that you could put your money somewhere that it would earn MORE than 1% per year over the entire 15 year term? Of course!
another tricky ploy
Why do banks and most mortgage lenders tell you to pay off your house early? Because you're going to save $100,000 in interest payments? Probably not...most banks and lenders are BUSINESSES and care more about what's good for THEM, not you.
Yes, IF you keep this new mortgage for the ENTIRE 15 years, you'll have paid less interest than if you stretched it out over 30 years. Did they ask you if plan on staying in this home for 15 years? Did they ask you if it was reasonable to assume that if you had a long-term investment, that it might earn you more than the mortgage rate you'd be paying?
So let's take a look at WHY a bank or lender would encourage you to hurry up and pay off your mortgage.
When any lender makes a loan, they go to great lengths to make sure that the borrower is capable of paying their monthly mortgage. The last thing they want is for the borrower to default on the loan. They DO NOT want to foreclose on ANY mortgage because most banks and lenders want nothing to do with owning property. Did you ever wonder why banks and lenders LOVE for borrowers to have at least a 20% down-payment on the purchase or 20% equity in the home if they are refinancing? Oh, and they always want an appraisal too. WHY?
Because when they make a loan, they want to KNOW that they aren't going to lose money WHEN you can't make your payment and they have to foreclose. Any good lender is going to make sure that if they have to kick you out of your home, they're not going to lose money in the process. By putting down 20% and actually, by accelerating how quickly you pay down the outstanding balance...you're actually reducing THEIR risk. If they have to send your home to auction, they can cut the price by 20% and still get out without losing too much. If you struggled to aggressively pay down that balance by 50%...and you suddenly miss a payment...the bank isn't going to hesitate foreclosing because now they are virtually GUARANTEED not to lose a dime!!!! They can sell that property for 50% less at auction because they convinced YOU to hurry up and pay off your mortgage.
Ugh. Painful to learn the truth sometimes, isn't it?
Yes, IF you keep this new mortgage for the ENTIRE 15 years, you'll have paid less interest than if you stretched it out over 30 years. Did they ask you if plan on staying in this home for 15 years? Did they ask you if it was reasonable to assume that if you had a long-term investment, that it might earn you more than the mortgage rate you'd be paying?
So let's take a look at WHY a bank or lender would encourage you to hurry up and pay off your mortgage.
When any lender makes a loan, they go to great lengths to make sure that the borrower is capable of paying their monthly mortgage. The last thing they want is for the borrower to default on the loan. They DO NOT want to foreclose on ANY mortgage because most banks and lenders want nothing to do with owning property. Did you ever wonder why banks and lenders LOVE for borrowers to have at least a 20% down-payment on the purchase or 20% equity in the home if they are refinancing? Oh, and they always want an appraisal too. WHY?
Because when they make a loan, they want to KNOW that they aren't going to lose money WHEN you can't make your payment and they have to foreclose. Any good lender is going to make sure that if they have to kick you out of your home, they're not going to lose money in the process. By putting down 20% and actually, by accelerating how quickly you pay down the outstanding balance...you're actually reducing THEIR risk. If they have to send your home to auction, they can cut the price by 20% and still get out without losing too much. If you struggled to aggressively pay down that balance by 50%...and you suddenly miss a payment...the bank isn't going to hesitate foreclosing because now they are virtually GUARANTEED not to lose a dime!!!! They can sell that property for 50% less at auction because they convinced YOU to hurry up and pay off your mortgage.
Ugh. Painful to learn the truth sometimes, isn't it?
we're going to tell you truth...ALWAYS
Call us now...we're here to answer EVERY question you have, make sure that what you are doing is in YOUR best interests!
WHY? Because we are NOT the lenders trying to convince you to do something that is really in their best interests...we're here to serve YOU and help you achieve YOUR goals.
513-654-5141 NOW IS THE BEST TIME to get the BEST RATES for YOU!
WHY? Because we are NOT the lenders trying to convince you to do something that is really in their best interests...we're here to serve YOU and help you achieve YOUR goals.
513-654-5141 NOW IS THE BEST TIME to get the BEST RATES for YOU!