Velocity of Money Part 4

We just discussed how this first Defining Moment, that your money will never be worth more than it is today, motivates banks and why they live by it, but how does it impact your mortgage?

If you own a home and have a mortgage on it you are probably the proud recipient of a lot of junk mail. Much of this mail is from financial institutions who want to inform you that making additional payments on your mortgage is a good thing. For whom it is a good thing is not clear to most but for those who understand this Defining Moment it’s very clear.

We touched on this a little bit before but let’s take it a little deeper.  Let’s start with this question: would you like to make more house payments now with dollars that will never be worth more than they are today? Or, make more payments later when the buying power of that money is far less?

Let’s look at some math.  If your mortgage payment is $1,000 per month, do you want to make more payments now when your money has the buying power of $1,000 or make more payments later when the buying power of that money is $412 thirty years from now? (Which is the buying power of $1,000 with a 3% inflation rate for 30 years).

What you need to understand is that the value of your home is going to go up or down no matter what your monthly payment is as well as no matter what your mortgage balance is at the time.

To prove that point, if there are two identical homes side by side and one is paid for but the other is mortgaged, at any point, the houses are worth the same.  Neither the payment nor the mortgage have any effect on the value of the property.

But by making additional payments or paying cash up front for the house, you have used the most expensive buying power dollars you could to do this. At the same time by using today’s money to make additional payments you have made the banks and mortgage companies very happy. Remember they are in a win-win situation. So what do you do?

We’d highly recommend you read our Mortgage blogs when they’re posted…so that means you’d have to subscribe. There is one thing I know that WE can do for you right now.

We can prove, again not with concept or fancy theory but good ‘ol 8th grade math, that paying extra and sending more of your most value dollars to the bank ahead of schedule actually hurts you financially.

Big paradigm shift, we get it.  Call us crazy but we also can prove that a 30 year mortgage can actually pay off FASTER than a 15 year mortgage using the exact same budget for both…even with a higher interest rate on the 30 year. Read that again. This can be proven with math and no investments are needed to accomplish this fact.  It’s true and can be backed up with simple math.

So, we’ll do our part for free by showing you. You just have to challenge us and be willing to learn something new.

Kelly O’Connor – kelly.oconnor@mtnfinancial.com

303.578.9708

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3 Responses to Velocity of Money Part 4

  1. KevinM says:

    When will you publish the next article on the 30 vs. 15 yr. mortgage. I keep checking back every few days for an update. Thanks.

    • bethebank says:

      KevinM, I apologize for the extended length between posts for the latest mortgage series. No excuses other than a very busy couple months with business travel, speaking and maintaining the service with my own clients. I’m about 3/4 of the way done with it and because of your message I’ll promise to have it finished this weekend. It’s strong…actually, it’s just math.

      So many people argue and argue that doing anything other than paying off your home as quick as you can is a horrible decision. Ironically, the banks are on their side too. So the banks are in the business of collecting interest and they promote you accelerating your payment so you could save interest? Doesn’t make sense; but, if you understand how the banks make money then it makes perfect sense…for them.

      At the end of the day, I want everyone to have their home free-and-clear, I just challenge who controls the money along the way. Fortunately, the math lines up on my side. Some say, “who cares if the math lines up? You either are a slave to the bank or you’re not.” That’s just false. The bank is in fact slave to me because I am in control. I have clients here in Colorado who had their home burned down during this past summer and a client who had a home destroyed in Hurricane Katrina. Who’s the boss in their case? If their home was free-and-clear then all that money was lost. Instead, they maintained control and the bank was the one freaked out. That’s just fine. It’s not about investing either as you’ll see in the next post. Long response, sorry.

      Here’s a short video of us discussing this topic: http://www.youtube.com/watch?v=aemnjCLKsWs

      Kelly O’Connor

    • bethebank says:

      It’s finally done. Playoff football messed up my weekend calendar.

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