Why We Never Get Our Homes Paid Off

Have you ever looked at your amortization schedule for your mortgage? If you have, you probably wish you hadn’t. If you aren’t sure what an amortization schedule is, it is a schedule showing the breakdown of interest and principal applied for each monthly mortgage payment. It also shows a cumulative total for interest paid and remaining balance outstanding for each month for the entire term of the loan.

For example, a $250,000 loan at 3.75% interest rate for thirty years would have a monthly principal and interest payment of $1,157. Out of that $1,157 a mere $376 would be applied towards the principal while $781 would go towards the interest. That means that only 33% of the monthly payment would go towards the principal while 67% would go towards the interest! This is exactly why your balance goes down so slowly. In fact, can you guess how long it takes to get to the halfway point in reducing your balance with a thirty year mortgage? It takes twenty one years!

And if that isn’t bad enough, consider that most people will move or refinance every five to seven years, which means that they are starting over with the worst ratio of interest and principal in each payment. Additionally, they are also typically adding several thousand dollars in closing costs on top of the principal balance when moving or refinancing, so it is a continual process of one step forward and two steps back.

Had you ever scrolled all the way down to the bottom of the amortization schedule, you would see the total interest paid if you were to stay in that mortgage for the entire term and pay it off completely. Assuming a thirty year mortgage, a ballpark estimate of total interest you would pay would be close to the entire amount financed for the home. Yes, you read that correctly. So in essence you are buying two homes: one for you and one for the bank!
While historically low interest rates over the past few years have eased things a bit, even at a very low 3.75% fixed rate, the total interest paid over the life of the $250,000 loan would still be $166,804!

Using traditional methods, the only options to avoid paying this outlandish amount of money in interest are either by making extra payments, making bi-weekly payments or by refinancing into a shorter term loan such as ten, fifteen, or twenty years. While these options do reduce the amount of interest you will pay, the huge downside is that you are putting yourself out on a financial limb. Think of it: you are committed to a higher monthly payment while your positive monthly cash flow is reduced. Should you experience any type of financial hardship, your equity is trapped and this may cause you to not be able to make that higher payment, therefore putting you at greater risk of losing your home and equity.

The good news is that with the Designed to Prosper strategy, you can actually significantly reduce your risk because ---
• Your equity is liquid and accessible.
• Your payoff time is significantly shorter due the huge amount of money that you will save in mortgage interest.
• Your monthly payment is smaller.
• Your monthly positive cash flow is greater and continually increasing in your favor.

Schedule a free consultation to see when you could have your mortgage paid off and how much interest you could be saving.