[M632]Monthly Mortgage Payment Calculator

For example, if you borrow $200,000 over 30 years at a rate of 5%, your monthly payments would be around $1074. Over the next 30 years, you will actually cough up an additional $186,640 in interest for a grand total of $386,640!

Now, the reason that banks and financial advisors tell you to pay more is that because if you could pay an extra $246 a month with a total of $1320 going toward your mortgage each month then you would cut 10 years off your mortgage payment period. You would save $69,756 over the course of the loan and reduce your total payments to $316,664.

OK, so maybe now the little voice in your head is saying something like, "I don�t want to pay more each month� I want to pay less each month like the title of the article says. Now I am to show you why handing over more money toward your mortgage is not the best move that you can make. The major flaw with what the banks and financial advisors are preaching is that it does not take into account the "time value" of money.

That said, let me first explain why financial advisors and the banks preach what they do before we get into the time value of money. Paying off your mortgae faster means much less risk to the bank and it gives them the opportunity to lend the money to others. In addition, when banks decide what people to target for foreclosures, they always pick the people that have PAID MORE toward their mortgage because they expose themselves to less risk. This is completely the opposite of the belief that the bank won�t target people that have forked out a lot more money. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money.

The Hilton Hotel empire is probably the best example of this. During the Great Depression, when homes were being foreclosed on left and right, the Hiltons did not have one property foreclosed on even though they fell behind in the payments several times. Basically, they made sure that the banks would not target them since they owed so much money (and still do since they never pay off their properties.)

I really have no idea why, when it comes to financial advisors, that they tell their clients to go this route. They know that the banks first target those that have paid more. Finally, having their clients pay off their mortgage actually costs their clients and themselves (because they get paid by making their clients money) a ton of lost profit because of the time value of money.

Everyone knows that money is worth less now than it was when they were younger. In 30 years time, using the mortgage payment example above, when the last charge is due, that $1074 charge will be only worth about $437 today.

Whether it�s one, ten or one hundred years from now, a dollar today will always be worth much more.

So, in our example, how does the time value of money affect everything?

You can�t just take the 30 year mortgage and subtract the interest that was saved. What you need to do is calculate the Present Value of every mortgage.

The Present Value of a 30 year mortgage fixed at a 5% interest rate and with payments of $1074 is $200,066.

The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200,066. The Present Value of a 20 year mortgage fixed at a 5% interest rate and with payments of $1320 is $200,066.

Both are equal.

The $69,756 "savings" 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.

On the other hand, what would happen if you took that same $246 every month and invested it elsewhere?

Averaging a 10% rate of return, you would have $186,804 (Note: an S&P 500 Index Fund would be an excellent choice as the S&P 500 has average a 10.83% rate of return over the last 50 years.) With inflation at 3%, that would be worth $102,597 in today's money.

To get even more answers, let�s ask the question we asked before. Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better, right?

The banks love being able to prove (and make it seem like they are only doing it for your benefit) that their recommendations will "save you money". But in reality, the banks really understand the time value of money. The banks know that $246 today is worth a lot more now than it will be in 20 years.

There are some good arguments for paying off your mortgage faster like building your equity. However, you should fully understand that every dollar that you give the bank is a dollar that you cannot invest elsewhere.

I don�t know about you, but I think that its pretty stupid to worry about forking over more overall interest when that money can easily make you two to three times as much money while still paying off your house.

Finally, many people have a misconception about the wealthy that I want to dispel. Most unwealthy people believe that wealthy people don�t have mortgages and that they own their homes 100%. The fact of the matter is that most do not own their homes free and clear because they understand that their money can make them a lot more money in other investments rather than sitting in the walls of their homes. Bill Gates took out a mortgage for his new home. The Home Depot doesn�t own any of the land or buildings that they use. Why should you pay off your house?

Of course the title of this article talks about actually lowering your monthly expense while building wealth at the same time and I would love to show you how to do exactly that. If you would like to know how to cut your monthly expense while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.