Think Like A Bank
By Elizabeth Dougherty
Would you pay $80,000 for a
$30,000 car? Or course not.
How about $800,000 for a $300,000
house? No? That is almost exactly what
you will pay over 30 years with a $300,000
mortgage at 8%-$300,000 for the house
and about $500,000 in interest to the bank.
For every three dollars you pay toward
the price of your house, you will pay an
additional five dollars to the bank in interest.
You might think that the builder made a
fortune when they sold you the house. Not
true. They probably made a modest profit, if
that, but they have huge carrying costs and
take a tremendous gamble with overhead,
labor costs, material costs, interest rates and
the fees to the banks they use.
But the amount of money the bank will
get makes this look like small change.
How can this be?
The two important words are "interest"
and "time."
Together they can work financial
miracles for you – or tremendous hardships
against you.
What actually is a mortgage?
A typical mortgage consists of two
documents. The first is the NOTE between
you and the bank or lender. This basically
details the terms and mathematics of the
agreement. You borrow $300,000 and agree
to pay it back in monthly payments over 30
years at an annual interest rate of 8%.
The mortgage is the agreement that
pledges your property as collateral, should
you not be able to live up to the terms of
the note. The term mortgage comes from
the French words "gage" meaning pledge
and "mort" meaning death. Supposedly, this
translates into the death of your "pledge" as
the debt is paid off.
The math of it all.
Every month that you make a mortgage
payment, some of it goes to principal and
some goes to interest. Most people know
that in the beginning the payment is mostly
interest and only a little principal – VERY
LITTLE.
If you purchased a house with a
$200,000 30-year mortgage at 8% your
payments would be $1467.53 per month.
At the end of the first year you would have
made twelve payments or $17,600. You
remaining balance would still be $198,329.
You have only paid down $1,671. You have
paid to the bank almost ten times that
amount or $16,000 in interest.
In the first year of your mortgage, for
every ONE dollar that went to pay down the
principal the bank got TEN dollars. WOW.
Here's a quick question. How long
before the principal of a 30-year mortgage is
half paid off? Not 15 years? Not 20 years?
It will take you almost 25 years to pay the
note down 50%. How's that for having time
and interest work against you?
What can you do?
Easy, get time and interest to work for
you. Think like a bank.
There are plenty of companies today
that will "help" you "reduce your mortgage."
Avoid them. You can do this yourself.
Easily.
The secret is to pay just a little more
to the bank than your mortgage payment.
The compounding of interest will then be on
your side. Sounds too simple, doesn't it? It
isn't.
Using the above 30-year $200,000 8%,
mortgage as an example, your monthly payments
would be about $1468.
At 30 years you will pay a total of
$528,310 or about $328,000 in interest.
For only $7 per day more you can
cut TEN YEARS off your mortgage and save
$127,000 in interest. By increasing your
payment by $205 your house will be paid
for in 20 years not 30. By increasing your
original payment by $12 per day. You can
pay your house off in 15 years, cut 15 years
off your mortgage and save about $185,000
in interest. Is that worth $12 per day? You
bet it is.
Elizabeth Dougherty, a resident of
Auburn, is a former Real Estate Broker
and Mortage Broker. She can be
reached at EADougherty1@aol.com.
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