Business Assistant/Business Assistant.iso/home/hloan101/loan.$$$

Text File | 1992-07-12 | 6.8 KB | 125 lines

        HOW TO SAVE TENS OF THOUSANDS OF DOLLARS ON ANY LOAN

    Many home  owners are  not fully  aware how  much money can be
actually  saved  in  interest  expense  by  shortening  the  life of a
mortgage.  Home  Loan Diary, and  this document, have  been created to
show the  homeowner the  HUGE savings  that can  be realized by making
additional  principal  payments  to  a  loan.   There  are no gimmicks
here, just simple math!

    For an example, let us take the case of a $125,000 loan at 10%
interest  with  a  life  of  30  years.   The monthly payment would be
$1,096.96.   The total  repayment is  $394,907.14.   After subtracting
the $125,000  principal amount  that the  borrower received,  there is
a  total  interest  charge  of  $294,907.14.   This  is  nearly  three
hundred thousand dollars,  over a quarter  of a million  dollars, just
in  interest,  that  the  homeowner  pays  to  the  mortgage  company!
Nearly three times the amount of the original loan!

    Most  homeowners  would  love  to  burn their mortgage papers.
Many  dream  of  one  day  fully  owning  their home, of obtaining the
peace of  mind that  comes with  no longer  having a  house debt  over
their heads.

    This  dream  can  become  reality  sooner than most homeowners
think.   Many  people  are  not  familiar  that  even small additional
payments can decrease the total amount of interest they will pay.

    To  shorten  the  length  of  one's  mortgage,  one may either
increase his monthly  payment, or pay  an extra lump  sum periodically
which  will  be  applied  towards  reducing  the  principal balance he
owes.   Whether the  additional payments  are $50  per month,  or $200
per quarter, the outstanding principal can be reduced rapidly.

    To continue our example, if  you added an extra $50  per month
to the  $1096.96 mortgage  payment on  our $125,000  loan, the  length
of the loan decreases  from 30 years to  24 years.  The  length of the
loan decreased by  20%, for only  $50 per month!   By adding only  $50
to  this  loan's  monthly  payments,  you  can  shave 6 complete years
from  the  length  of  the  loan.   You  would  have  also  realized a
savings of  nearly $65,000  - money  that you  would have  paid out in
interest.

    If in our example we wanted to get more serious, an extra $100
per  month  applied  towards  the  outstanding principal would shorten
the life of a  30 year loan by  a nearly a third,  to 20½ years.   The
homeowner would  realize a  savings of  more than  $100,000 that would
have gone towards interest.

    By now  you should  get the  picture.   Think how  quickly you
could pay off your home mortgage if you really got serious!

    If we have not grabbed your attention by now, then either  you
are rich,  or simply  do not  mind living  in debt  to another person.
For those homeowners who  do care, and who  do not want to  be a slave
to the  mortgage company  longer than  they have  to, prepaying a loan
and using Home Loan Diary to do so makes sense.

    Some homeowners may reject the above plan because they do  not
expect to  be living  in the  same house  five years  from now.   They
would prefer  save the  $50-$100 per  month to  use as  a down payment
on a larger home in the future.

    What such homeowners fail  to understand is that  prepaying an
existing  mortgage  results  in  a  larger  and faster growing equity.
In  short,  they  will  have  more  cash after they sell their current
home with which to put down on a new property.

    Homeowners  who  balk  at  the  idea  of prepaying a loan also
forget  that  the  interest  rate  they  pay  the  mortgage company is
almost  always  higher  than  the  interest  rate  paid  on  a savings
deposit.   As  we  write  this  article,  mortgage  rates  are running
about  8.25%  for  a  30  year  fixed  rate  loan.   At the same time,
passbook  savings  accounts  earn  only  4.25%,  and  certificates  of
deposit  around  5%.   If  you  bought  a  house today at 8.25%, every
dollar that  you apply  towards the  principal of  your mortgage  is a
guaranteed investment of  8.25%.  Prepaying  a loan therefore  is wise
and makes  good financial  sense.   Of course,  you should  not go out
and withdraw  all your  money from  passbook savings  accounts and CDs
to  pay  off  your  mortgage,  for  a  3-6  month  reserve  of cash is
necessary  and  prudent.   But  when  you  have  an ample surplus, the
money you  put into  your house  to reduce  the duration  of the  loan
nets  large  savings  -  more  than  you could get at the neighborhood
bank.

    Another good reason to  make additional principal payments  is
that  the  need  for  private  mortgage  insurance  can  be eliminated
sooner.   Many  people  take  out  a  90%  mortgage (where one makes a
cash downpayment of 10%  of the cost of  the house) because they  wish
to purchase a  home they expect  to live in  for a long  time, but are
short  on  savings,  but  have  adequate  earning  power  to   support
monthly mortgage payments.

    With  these  90%  loans,  however,  most  banks  require   the
homeowner to purchase  an insurance policy  to insure that  portion of
the  loan  in  excess  of  an  80%  loan  to value ratio.  This can be
expensive, and  run as  much as  $1,200 per  year on  a $125,000  loan
amount.

    If the homeowner reduces his mortgage to an 80% loan to  value
as soon as  possible, the payments  that go to  mortgage insurance can
be used to pay off the loan in even a shorter length of time.

    Another objection  that one  may raise  against shortening the
life  of  a  mortgage  is  "I  bought  my  home  so I could deduct the
interest expense."   This makes  as much  sense as  quitting one's job
and  staying  at  home  simply  to  avoid paying any employment taxes.
To want  to remain  in debt  simply to  enjoy a  larger tax  refund is
odd thinking to  the writer.   Many people have  this notion that  the
tax  write  off  that  can  be  claimed  against  mortgage interest is
greater  than  the  amount  of  savings  realized  from  prepaying   a
mortgage.   This  is  rarely  the  case.   The  loss of tax shelter in
paying  less  interest  is  almost  always  less  than the savings the
homeowner will receive by avoiding future loan payments.

    We hope that by now you see why prepaying a mortgage is smart.
We  hope  that  you  will  make  Home  Loan  Diary  a  part  of   your
prepayment plan.   We also would  like to remind  you that the  $10.00
registration fee for  this program is  an obligation (debt?)  you have
to  the  author.   This  program  is  not  free.  Consider the tens of
thousands of  dollars you  will save  by using  the strategy  outlined
in this document,  and by using  Home Loan Diary.   Then consider  the
$10.00 registration.  It will be the best $10.00 you ever spent!