"THE MOST POWERFUL FORCE IN THE UNIVERSE IS COMPOUND INTEREST."
Einstein’s superlative assessment is due to the fact that it grows logarithmically and it becomes a juggernaut over time and eventually an irresistible force. It is the Law of Compound Interest that dictates that to repay a 30-year fixed-rate loan of $300,000 @ 6.0%, one will have to remit $647,515. So, the best way to reverse its effects is to shorten the time frame, as discussed in “TERMS” not everyone is able to afford the payment increase associated with moving from a 30-year mortgage to a 20-year or 15-year.
A good alternative is what is known as a BI-WEEKLY payment. It enables one to PAY OFF A 30-YR. MORTGAGE IN 24 YEARS, A 20 YEAR, IN 17, AND A 15, IN 13 AND SAVE TENS OF THOUSANDS OF DOLLARS in interest without an increase in your payment. The bi-weekly works in the following way, instead of paying your mortgage monthly, you pay HALF your monthly payment EVERY TWO WEEKS. Because the lender is getting HALF their money back in HALF the time, the interest compounds at a slower rate AND because there are 52 weeks in a year the borrower is in effect making 26 half payments per year OR the equivalent of 13 monthly payments instead of the usual 12. If this sounds onerous, it really isn't, you can have your bank or the mortgagee's bank set-up an auto pay plan that drafts out of your checking account every two weeks OR (for many of you, easier still) make 1 extra mortgage payment per year.
So that you have some feel for and dollar approximation of what I'm talking about here, let's consider the earlier example (in “TERMS”) of a $300,000 loan for 30 years @ 6%. By going WITH A BI-WEEKLY PAYMENT you would SAVE $76,417 over the life of the loan and OWN YOUR HOME in 24 YEARS (instead of 30). If you were to COMBINE A BI-WEEKLY PROGRAM WITH shifting to A 15-YEAR mortgage from a 30, the interest savings is substantial--some $214,000 on a loan amount of $300,000 ($347,514 vs. $133,949) and own your home free and clear in 13 years.
If this interests you, ask me about it. Or, if you’d like to see the impact as regards you own personal situation use the loan calculator at my website www.mortgagestraighttalk.com Simply, enter your loan balance, interest rate and mortgage term.
1. Then go to Prepayments use the dropdown menu for type, select Yearly,
2. For Amount enter your Monthly Mortgage Payment,
3. Hit the Calculate button down below and your voila your savings will appear where it says Savings.
The real impact, however, is to be seen in the graph to the right because it shows that one has paid off the loan 6 years sooner!
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