Real Estate Info & FAQ

A simple idea to save money

I wanted to take a moment to throw an example out about the power of putting some money to the side. I am comparing this to the question of paying extra on your principal balance on your home loan, or investing the money.

Lets say that you just bought a home and borrowed $170,000 at 5.75% on a 30-year note. That payment would be $992.07 per month. You have budgeted and decided that you have $100 extra per month to put somewhere. Now, does that go to the lender or in a bank account?

If you give it to the lender as an extra principal payment, you will pay the loan off in almost 24 years (287 months to be exact). You will save a gross amount of $44,150 on the tail end of the loan. But, you did have to send in $100 per month for this time frame, so your “investment” in the home made $15,450 over the course of this time frame. That is a rate of return of 3.35%.

Now, what if you put that money to the side? The logical question is where is the best place. That answer is beyond the scope of this article, but I know that some online banks pay about 4% for simple money market accounts. CD’s pay in the 5 to 6% range. And, if you an find a good planner, I know that most of them can get you 10% if you give them enough time (7 to 10 years). So, lets just average it at 6%.

You take that $100 and put it somewhere that will earn ON AVERAGE, 6% per year. You pay the normal payment on the home. At about the same time (month number 287), you will have enough in this side account to pay the loan off in full. This assumes that you make 6% on average. If it makes 8% on average, you will have thousands more in the account than is needed.

The other benefit to this is that the side account is liquid. It is money that you can access for good or bad reasons, for investment opportunities, or to get you through a job loss or disability. I know from working in the mortgage business, lenders do not like to loan to people that do not have a job. There are loans, but there are strict limitations on cashing out equity and higher than normal rates. What if you had one-year worth of salary in this account and could take your time looking for a new job?

I know that this is very verbose and I apologize for the length. I am simply passionate about this topic. Americans have become HORRIBLE at saving, and anything that I can do to help people save just $25 per month, I will do it.

Labels: Financing, Mortgage Planning

posted by jkballentine @ 5:02 PM