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 pay an additional $186,640 in interest for a grand total of $386,640!

You could cut 10 years off your mortgage payment period if you could simply fork out your typical mortgage amount plus an additional $246 each month. On top of that, you would cut the total to $316,664 and save an incredible $69,756!

Now, you might be saying something to yourself right now like "But Ed, I want to decrease my payments like the title of the article says? I don't want to fork over more every month!" Now I am to show you why forking out much 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. Because the homeowner that has PAID MORE money toward their mortgage is less risky for the bank, the bank prefers to target them first. This is contrary to the beliefs of most people that tend to think that because they paid much more, the bank won't target them. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money.

The prime example of this is the Hilton Hotel empire. When homes were being foreclosed on left and right during the great depression, the Hiltons, even though they fell behind on their payments several times, did not have one property foreclosed on. 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 those that have paid a lot more are targeted first by the banks. And because of the time value of money, they are also costing their clients and themselves (since they get paid based on what they make their clients) a ton of lost profit.

Everyone knows that money is worth less now than it was when they were younger. Using the mortgage example above, in thirty years time, the last charge of $1074 will only be worth about $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.

How does the time value of money affect our example?

You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. To truly determine the best choice, you need to calculate the "Present Value" of each mortgage option.

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.

The two repayment schemes are exactly equal.

In truth, that $246 per month adds up to $59,040 over 20 years so you are not really saving $69,756 but rather about $10,000.

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

If you could get an average return of 10%, after 20 years you would have $186,804 (Note: the S&P 500 has averaged 10.83% over the last 50 years and would make an S&P 500 Index Fund a safe yet powerful choice.) 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 average Joe simply doesn't understand the time value money as well as the banks do. The banks know the true value of that extra $246 a month that you're giving them now is much greater now than it will be in the future.

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.

Why give up your right to have your money safely and conservatively make you 10-30% to save 5%. Doesn't that sound pretty stupid?

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 charge 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 lower your monthly charge while at the same time build your wealth then please contact me, Ed Brancheau, at 310-770-2369.