Let’s say you’re applying for a home loan.
You have a choice…
Option #1 – A 30-year fixed mortgage at low interest rate of 3%, or
Option #2 – 80% of all your mortgage payments will go toward interest?
Which option would you choose?
Most of us do! Actually, the answer is: It doesn’t matter – they are identical. When you take a 30-year fixed mortgage rate (no matter how LOW the interest rate), upwards of 80% of your mortgage payments will go toward interest.
Stay with me, I’ll explain.
I get it, home ownership is important, but our house probably takes the biggest bite out of our monthly income. It can cost us literally thousands of dollars in interest over time.
Why are mortgage payments mostly interest? Here’s what you might not know. Mortgage payments are generally set up here in the U.S. so each monthly payment is the same amount. This keeps housing payments more affordable (and predictable). The balance is paid off evenly over a long period of time, say 30 years. Even though the payment is fixed, principal and interest for each month will change until the loan ends.
There is no question that the best way to buy a home is to pay cash up front. The most obvious advantage is NO mortgage, NO interest payments. Of course, it’s not that simple for the majority of us. Like it or not, a mortgage is often just a fact of life. But, it is a good idea, right? After all, mortgage rates are dirt cheap, so shouldn’t we take advantage of them? Absolutely! But, we can get the best of both worlds.
Let’s run some numbers and I’ll show you how.
Assuming three years ago you got a 30-year $300,000 mortgage with a 5% interest rate and a monthly payment of about $1,610.46 (excluding taxes and insurance). Over the next 30 years, you’ll pay over $579,760 in principal and interest. The total amount of interest due over 30 years is close to $1279,770. The #1 downside to your mortgage is all that interest – you’ll pay nearly double what you agreed to pay for the home. But, no surprises here, right?
Here’s what you need to know. Your 5% LOW INTEREST mortgage is really costing you upwards of 60% or more!
The problem with the interest rate our lender gives us doesn’t reflect the TRUE cost of borrowing money. Running a simple amortization schedule will show that the first month’s payment consists of $360.46 in principal and $1,250 in interest. In short, the first payment is mostly interest – in fact, interest accounts for nearly 70% of the first payment!
Think about it this way: It costs us $1,250 to borrow $360 the first month!
Do you see the whopping thousands in potential savings by paying off your mortgage early? The gains are simply undeniable. For as little as what you would pay to go out for a nice dinner each month, you could cut 18 years of house payments completely out of your life! And not only that, you would automatically be $135,000 richer! Who doesn’t want that?
You might be saying, “I’m not actually going to stay in the house for 30 years.” Did you know, most of us move on to another mortgage about every 5-7 years? It’s for this very reason that mortgage payments tend to be mostly interest – we never get to the point where the principal actually surpasses the interest. This way of thinking is what keeps us in debt longer!
Remember, when a bank lends us money to buy a home, it obviously does so to profit. The sooner we pay down our principal, the less money we lose to interest. This means more cash to invest for retirement, college or whatever life goal we see fit.
How much interest will your mortgage cost you over the lifetime of your loan? This is where we can help. We’ll explain how a simple, straightforward calculation will show you year by year your real mortgage interest rate.
Do you see the whopping thousands in potential savings by paying off your mortgage early? The gains are simply undeniable. For as little as what you would pay to go out for a nice dinner each month, you could cut 18 years of house payments completely out of your life! And not only that, you would automatically be $135,000 richer! Who doesn’t want that?
You might be saying, “I’m not actually going to stay in the house for 30 years.” Did you know, most of us move on to another mortgage about every 5-7 years? It’s for this very reason that mortgage payments tend to be mostly interest – we never get to the point where the principal actually surpasses the interest. This way of thinking is what keeps us in debt longer!
Remember, when a bank lends us money to buy a home, it obviously does so to profit. The sooner we pay down our principal, the less money we lose to interest. This means more cash to invest for retirement, college or whatever life goal we see fit.
How much interest will your mortgage cost you over the lifetime of your loan? This is where we can help. We’ll explain how a simple, straightforward calculation will show you year by year your real mortgage interest rate.
So, here’s the big question: After looking at the math, why would anyone not want to pay off their mortgage faster? Somewhere along the line, we’ve become socially conditioned to believe a mortgage is a fact of life. But in reality, this debt only gives us the illusion we’ve reached the American Dream. It’s practically impossible to win with money with a mortgage. Be wary of the argument that you should hold on to a lower-rate mortgage because you can earn more than you’re paying in interest. Have you ever imagined what you could do with an extra $1,610 per month?
We’ll give you a personalized plan and the tools to do this. At no cost to you, we will share with you some seriously smart strategies to transform your debt into wealth. It will open your eyes and give you hope, no matter if you’re new to managing money or have been at it for decades. We cover specific and effective strategies for eliminating credit cards, student loans, auto loans, and mortgages quickly.
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