Suppose you had a mortgage. (Hey, it could happen.)
Suppose your mortgage balance was $250,000, your interest rate was 5.75%, and your standard monthly payment - principal and interest - amortized over thirty years was $1,459.00
Suppose you wanted to "slam-dunk" it: pay it off early, avoid some interest expense, and experience the satisfaction, freedom, and peace of mind of owning your house free and clear while you're young enough to enjoy the achievement of getting this "monkey with a long tail" off your back.
Besides receiving an inheritance,
robbing a bank, winning a lottery, or divine intervention, what are your
choices?
Or put another way, in total you have about $525,240 ($1,459 x 360 months) to manage. (To be exact, because the 360th payment is partial, the total would be $525,168.) You've already signed on the dotted line, you're already committed. It's a done deal.
If you followed the standard amortization, over the course of thirty years, $250,000 of this would pay off the mortgage, and $275,168 would be spent on interest. (Did you notice that the total interest is more than the amount borrowed, or that you're paying for your house more than twice?)
Finally, suppose you were willing and able to devote an extra $200 per month, or $2,400 per year, for as long as it made sense, to pay off the mortgage as soon as possible.
What would be the best way to manage this money to REALLY OWN your house?
Here are your choices:
- Make a thirteenth monthly payment. This is very easy - almost automatic - if you are a W-2 employee on a biweekly payment schedule. (Trade-off: no more bi-annual "bonus" when there are three paychecks in a month.) Entire businesses have been created based on this model alone.
- Pay $200 more than the scheduled monthly payment. If you did this religiously, you would shave just under eight years off the mortgage and save about $81,000 in interest. Not bad. Pretty good, actually.
- Pay more than the scheduled monthly payment - say, $200 - from another debt, like a Home Equity Line of Credit (HELOC). Use costly, elaborate software to juggle a complex "portfolio" of debt so that in the end, you're (hopefully) better off. (Does this REALLY make sense??) Entire businesses have been created based on this model, too.
- Continue making the standard monthly payment, and put the "extra" $200/mo. in a Mortgage Balloon Payment Sinking Fund, a non-retirement mutual fund or portfolio of mutual funds with a higher overall rate of Return on Investment (ROI) than your mortgage interest rate. When the fund balance exceeds the mortgage balance, slam-dunk the mortgage. Thereafter, save the mortgage payments you would have made in this same fund for other purposes like emergencies, fun, retirement, etc.
#4 is the best way to go.
Trade-off: it takes discipline.
That's where Making End$ Meet can help.Here are four examples of how this would work. Click the links in the Illustration column for detailed amortization schedules. (To make your own custom Mortgage Slam Dunk plan,
opt in above right to download the template.)
Illustration
|
Net Interest
Expense (Income)
|
Interest
Saved
|
Payoff
Month |
Time Saved
(Months) |
Year 30
Fund Balance |
1 - ROI 7.5%
|
$103,097 |
$172,071 |
254 |
106 |
$222,068 |
2 - ROI 10.0%
|
($13,748) |
$288,917 |
233 |
127 |
$334,797 |
3 - ROI 12.5%
|
($194,538) |
$469,706 |
214 |
146 |
$511,855 |
4 - ROI 15.0%
|
($479,993) |
$755,162 |
197 |
163 |
$793,967 |
Are you getting this?
If you manage your money right, instead of SPENDING $275,168 on interest, you could MAKE as much as $479,993!
And, instead of JUST paying off your mortgage at the end of 30 years, you could do that AND have as much as $793,967 in the bank!
You may be wondering, "Where can I get 7.5% -
15% return on investment?"
I answer that question every
spring. For this year's answer, click here.
It's all about management.
Does this motivate you to find some way to come up with a couple hundred bucks a month, and consider getting a little professional help?
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