Mortgage Reduction
Mortgage Reduction Secret Weapon: Your Down Payment Part 1 of 3
Part 1: A primer on wealth creation and good Mortgages work.
The personal finance literature is filled with tips to help you pay off your mortgage sooner than the standard 30-year amortization period. Most of these tips are dependent of bank-sponsored bi-saver program or snowflakes and snow ball debt reduction plans aimed at helping a homeowner his or her own home last year and save thousands of dollars in interest payments. Each of the mortgage strategies pales in comparison to the method available to every homeowner with a payment. What is this method? Strategic use of the payout.
Before I outline this strategy, it is important to review some important principles with respect to housing wealth and money management.
Principle 1:
As iconoclastic as it may seem, is a home not an investment. According to Wikipedia, is to invest the active redirection of resources from being consumed today to create benefits in the future, use of assets to make money or profit. Currently, millions of homeowners have learned that they will serve either income or gains from the sale of their home. But what is happening today as regards house prices are not far beyond the usual, what happened in the past decade in terms of housing appreciation is. Robert Schiller, Professor of Economics at Yale have identified housing prices since 1890. In fact, the average annual investment return from 1950-2000 was less than half of 1% per year after adjusting for inflation. This means that $ 100 dollars invested in a home in 1950 was worth $ 104 in inflation-adjusted U.S. dollars in 1997. Housing prices have yet to fall further to reach historical norms. At best, a home a form of forced savings plan where the home interest deduction and intangible advantage of home ownership accrue homeowner. How much of an economic benefit is that? A quick trip over to Hugh? S calculators gives the following illustration of a $ 125.000 mortgage without payment. Over life loan, the homeowner will pay $ 166,869.14 in interest payments. At best he will enjoy a lower fee equivalent to $ 55623 over the loan due of the interest deduction. Leaving roughly $ 111 000 that will go to the banks as profit for them. That homeowner would have paid about $ 236 000 for a $ 125,000 home appreciates of perhaps 1% annually in inflation-adjusted dollars. The $ 236,000 figure does not include 30 years worth of property taxes, insurance, maintenance and repairs. A home is not an asset, it's a roof over their heads. The blog, Get Rich Slowly gives an excellent comparison between the costs of renting versus the costs of owning a home in the Seattle area.
Principle 2:
To create wealth, then each unit of money to do more than one job. On the surface, a home seems to do it. A home is a roof overhead and equity that can be exploited for future use. But is it really? Who decides whether and when a homeowner can tap equity? The Bank does. When is a person most likely to need for equity? ? When the bank doesn t want him to have it: during tough economic times, during periods of job losses or cuts when income has been cut. Even during boom times homeowner? Income-to-debt ratio will determine if he can not press equity in his home, how much he can tap and at what interest rate. The recent meltdown in NJNA (no job, no asset), Alt-A and no doc loans will ensure that home equity would be difficult to use for everyone. A home, so does one thing: it provides a roof over one? head.
Principle 3:
To minimize the opportunity costs people seeking to create wealth, must maintain a degree of liquidity. It means access to ready cash for emergencies or to take advantage of long and short term investment opportunities. Freehold property implies inherently an opportunity cost of that capital flowing through the principle and interest payments are trapped and not easily available and cost of taxes, insurance, maintenance and repairs are true costs and no money available for investment. For a simple $ 145 000 dollar homes in my area charges insurance maintenance and repairs is approximately $ 3,500 dollars a year. It is money that is not saved, not invested to provide future benefit to the homeowner. Are insurance protect the home? Yes it does. Have repairs and maintenance protect the home? Yes they do but these are sunk costs and expenses which would not, in all probability be realized when the home is sold. These costs are the costs to preserve something that is appreciating at a glacially slow.
Principle 4:
Wealth is not automatic. Despite the number of books sold by the words? automatically? and? wealth? and? automatically? and? Millionaire? in their titles, not wealth does not come automatically. Now savings plans can and should be automated but the individual decisions that create wealth not by their nature can be. You can automate your stock market to invest, but you can not automate the stock market, so you become rich. You can automate your savings, so you have nothing to invest, but you can not automate economy so the yield is constant, and your savings earn a meaningful rate. You can automate debt payments but those payments will come at a hefty cost to the debtor in form of fees and this debt will be collected in terms that benefit the mortgage holder. Therefore a financial institution, especially a bank, access to your accounts in order on debt reduction is a risky proposal at best and would probably be beneficial to the bank by allowing them to charge fees that a person who truly seek to create wealth for themselves would do better to avoid. Finally prosperity requires more than producing a bulk stews, recycled aluminum foil, to deny yourself Starbucks or a cola. Prosperity requires consideration of what it really means to have wealth in all its many incarnations. It requires vision, choice and active participation. While Ron Popiel can encourage you to set it and forget it, do it with your personal finances will cause you to stop in your quest for wealth.
Principle 5:
Understand what a mortgage is and what it does. According to Wikipedia:? ? A mortgage comes from the old French? Dead lift? apparently means that the pledge ends (Dies) either when the obligation is fulfilled or the property is taken through foreclosure. In many countries it is normal for home purchases to be funded by a mortgage. Learn individuals have enough savings or cash to make it possible to buy a property Winner.? A mortgage, then a debt instrument of indebtedness.
There are four principles to understand about a mortgage:
1) Mortgages are front-loaded. That means that most of the payments during the first half of the loan term used to satisfy interest that while most payments made later in the loan is used to meet the principal. Put another way, the first payments term of the loan primarily go to benefit the bank and its investors, the latter payments in the loan primarily go to benefit the homeowner and building equity.
2) With a fixed rate loan, the principle and interest payments are fixed. The share of each payment goes to interest depends unpaid principle balance at the end of each months. This last statement is true whether the interest is fixed or variable.
3) extra principle payments have the greatest power the older they are made in the loan term.
4) Mortgages payments are made one month in arrears. If you close on a loan in January, your first payment is not paid before the first March. In the first years of your loan, you will make 11 payments. Although you will make 12 payments in the second year, you will always be a back pay.
One of the best explanations I have found how mortgages work and the advantages and disadvantages? The different payment options can be found in sur Gill's book: Own Your Home years earlier! Understanding mortgages Principles number 2 and 4 are essential to understand why mortgage reduction plans? Work, let's synthesize them again:
1) Key principle: The proportion of each payment goes to interest depends on unpaid principal balance at the end of each month.
2) Centrally principle: Mortgage payments must be made one month in arrears.
Part 2 of this series covers the wealth principles and the truth about bank-sponsored prepayment plans.
About the Author
Ouida Vincent is an active real estate investor and entrepreneur. Unfortunately people often pay more to live in their largest asset, a home, than they have to. This article is being published in 3 parts. Because it uses illustrations and graphs and active links that don’t appear in the individual articles, it has been published in its entirety on my weblog at http://www.ouidavincent.com/blog