Mortgage Myths Could Be Costing You $25,000
|Marc Eisenson is the author of The Banker's Secret, the book which tells you everything you ever wanted to know about prepaying your mortgage. The following article is reprinted with permission from his quarterly newsletter, "The Pocket Change Investor." |
If you've ever read anything else I've written, you know I think it pays to make pocket change pre-payments on your mortgage. For example, if you add just $25 to the required payment on a typical $100,000 home loan, you'll save over $25,000. Not only are the savings substantial, but they're also guaranteed, tax-free, risk-free, and painless to achieve.
So why aren't all 50 million mortgage holders pre-paying their home loans? They're stopped by these myths:
MYTH: It sounds too good to be true.
TRUTH: I admit it. Anything that promises to save you $25,000 or more sounds like a get rich quick scheme. And we've all been warned to avoid deals like that. However, investing in your mortgage -- even a piddling amount -- really does reap great rewards. It's no gimmick.
MYTH: I can't afford to pre-pay.
TRUTH: If you borrowed $100,000 at 8.5% for 30 years and just sent in an extra 25 cents a day, you'd save $9,069. A dime a day will save $3,779. Can't afford dimes this month? Send in pennies, but get into the pre-payment habit! Figure out where you can cut back, even just a little. Then send in what you can, when you can, and turn your debts into profit.
MYTH: I'll lose my only tax deduction.
TRUTH: The more you spend, the less you'll keep.
- It never pays to send your lender $1.00 in the hopes of getting back 28 cents or so from the IRS.
- Higher standard deductions mean that the first $6,700 spent on a couple's mortgage interest could be saving ... $0!
- Even if you itemize, pre-pay. Say you send in $25 a month more in just the first year of our sample $100,000 mortgage. You'll save $3,300 in interest over the loan's life. True, it'll cost you $3.35 in tax write-offs (assuming you're in the 28% bracket). But where else can you invest $3.35, and get $3,300 back, guaranteed?
MYTH: My bank will be angry if I pre-pay.
- Banks don't have feelings.
- These days, banks make most of their money up front -- on points and closing costs.
- When you pre-pay, the bank accumulates money to use to make new loans (which brings us back to b).
MYTH: I'll end up in a hassle with my bank.
TRUTH: Now that everything is computerized, lenders almost always credit pre-payments correctly. A data entry clerk enters your account number as well as the amount of your check, which includes a comfortable pre-payment. The bank's computer does the math, deducting your pre-payment from the outstanding balance of your loan.
MYTH: I'm probably going to be moving in the next few years, so pre-paying doesn't make sense.
TRUTH: While homeowners do tend to move every 5 to 7 years, they generally go from one mortgaged home to another, creating what I call a serial mortgage. Unique to each family, these loans are made up of the various mortgages a family takes out over the years.
If you keep pre-paying, no matter what mortgage you have at the moment, the ultimate result will be an early escape from mortgage debt -- meaning years of mortgage payments you'll never have to make. And some day, your home will actually be yours, free and clear!
Regardless of how often you move, every dollar you invest in your mortgage will earn you money at the rate you're paying. Have an 8.5% fixed rate loan? Your pre- payments will yield 8.5%. That's 8.5% tax-free. Why no taxes? Because they're savings, not income.
MYTH: I don't have the discipline.
TRUTH: You write out your mortgage check, don't you? It takes no more discipline to write a slightly larger check. In fact, it might be easier:
- You can round up your payment to a number that's a snap to remember and easier to write -- like $800 instead of $768.92 in our $100,000 example.
- Knowing that your $31.08 pre-payment will end up saving you over $31,000 can be a real motivator. It sure gave me the incentive to pay off my loan early.
MYTH: I'll get hit with a pre-payment penalty.
TRUTH: Pre-payment penalties are rare. Even when they can be imposed, most banks don't bother. Penalties on small pre-payments are so tiny, it'd cost the lender more than they'd collect to do the bookkeeping and billing.
MYTH: Pre-paying is so complicated, I'll need to hire someone to do it for me.
TRUTH: Nonsense! I know there are a lot of ads out there for "bi-weekly" or other mortgage acceleration programs. They're expensive and absolutely unnecessary. Send in what you can, when you can, and watch your equity grow!
The record keeping I recommend is far less complicated than balancing your checkbook. All you need is the right amortization schedule. And if you're not the type to balance a checkbook, you'll be happy to know that these days, few banks credit pre-payments incorrectly.
MYTH: My banker says the pre-payments will be subtracted off the back-end of my loan.
TRUTH: What you send in today immediately comes off the balance due your lender -- whether or not your banker understands how the math works. Since you owe less, more of next month's mortgage payment will go toward reducing your balance even further, while the amount that goes toward interest will go down. Your loan will cost you less because you pre-paid. And it'll be paid off earlier.
Your mortgage coupon probably has a space labeled something like, Additional Principal. Write in the amount of your pre-payment, send in your check, and know you've taken a painless, low cost step toward debt-free living.
MYTH: I can get a better return some place else.
TRUTH: After taxes? On $25 a month? In terms of traditional investments, I doubt it, unless you have a good 401(k) plan at work. But remember, the greater the return, the greater the risk. And there's nothing safer than the roof over your head ... or rather, the mortgage on it.
Of course, you don't have to do one ... or the other. You could sock away some money in the stock market, for example, and still pre-pay $25 a month.
Important: There is one place where you're guaranteed to get a better return than pre-paying your mortgage -- paying down your credit card balance. To save the most, pay off your highest interest debts first.
Send in an extra $25 every month on a $3,800 card balance at 17%, and save up to $5,756 ... while reducing your payoff period by over 27 years. (This is not a typo.)
No matter what your investment strategy, I'll wager that there's $25 or so a month -- whatever pocket change you throw on the dresser every night -- that you'd never notice, invest, or miss. Pre-pay on your debts!
For the complete story on pre-paying, with lots of tables so you can see how much you'll save, read The Banker's Secret by Marc Eisenson. Often called the bible of mortgage pre-payment, it'll save you a pot full of money. For a copy, order it online at the Good Advice Press site! NY 12523. 1-800-255-0899.
Also available: The Banker's Secret Loan Software ($42.95) lets you crunch the numbers yourself, and create pre-payment schedules that make the record keeping a snap.
The Pocket Change Investor, begun in 1990, is quarterly newsletter published by Marc Eisenson and Nancy Castleman. Each issue focuses on something that costs you and your family a lot of money. Let this team of consumer advocates show you how easy it is to profit from your debts, how to finance your child's education, when to rent ... or buy, and how to teach your youngsters to manage their money.
Learn painless ways to save on taxes, credit cards, closing costs, cars, insurance, appliances, utilites, vacations, trips to the supermarket, and the myriad of other expenses that regularly confront us all. It's worth far more than the $12.95 annual subscription rate. (Don't tell them, or they may raise the price!)