Let's say you're 25 years old and find a house on the market for $150,000. You love the house so much that you decide to buy it. You have the required 20% ($30,000) to put down in order to avoid PMI (private mortgage insurance), and you put the rest on a 15-year $120,000 mortgage at 7%. You decide to be billed once every two weeks, instead of once every month.
Principal: $120,000.00
Biweekly Payment: $497.37
Total Amount of Payments Per Year: $12,931.62
Total Amount of Interest (15-years): $73,975.02
Now, let's say that after you get the house you get a nice raise and are able to pay an extra $150 every two weeks towards the principal. That would make your total biweekly payment $647.37. If you keep paying this amount every two weeks for the duration of the loan, it'll be paid off in October of the 9th year, 5-years and 2-months early.
Principal: $120,000.00
Biweekly Payment: $647.37
Total Amount of Payments Per Year: $16,831.62
Total Amount of Interest (9-years, 10-months): $46,440.58
So that's great! You'll have an extra $647.37 to spend on whatever you want! But what if you took the money that would've gone towards the mortgage and invest it in growth-stock mutual funds? That sounds good, right? After all, the money that would normally be going towards the mortgage is freed up now. That amount would total $64,658.10 for the 5-years and 2-months.
If the $647.37 was invested at 8% starting the second week after the mortgage was paid off and ending with the original last payment period you would end up with $109,611.81. If left invested for 25 more years until age 65 (at 8%), you'd end up with $807,446.68. That's without even having to add any extra money after age 40!
Hmmm, and yet the average person wouldn't consider a 15-year mortgage. They'd just go with the 30-year and end up paying $167,278.51; $120,837.93 more than the accelerated plan.
But people will be people...
No comments:
Post a Comment