How To Manage Your Mortgage Payment



How To Manage Your Mortgage Payment

How to​ Manage Your Mortgage Payment
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!

How To Manage Your Mortgage Payment





Related Posts:




No comments: Comments Links DoFollow

Powered by Blogger.