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Car Loans and Leasing Are Your Biggest Hidden Expense
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The Magic Bullet Theory Of Investing
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Interest on the average home mortgage will cost the
homeowner nearly TWO TIMES the cost of the home.
If you were to purchase a $150,000 home with a $120,000
mortgage (80%), and you paid an interest rate of 9% for 30
years, you will have paid over $227,500 just in interest (in
addition to the original $120,000). That's nearly two times
the cost of the home!
A credit card debt of $7000 (now the average) at 18% being
paid at the rate of $20 principal plus interest each month
will take over 29 YEARS to pay off, almost as long as a home
mortgage. Interest charged on this credit card debt will
top $18,400, more than 2.6 TIMES the original debt!
If you work for a living, you know that when you are not
working, you are not getting paid. But interest never gets
sick, never takes a vacation and never sleeps. It is
working against you 24 hours a day, seven days a week, each
and every day of the year.
So what can you do?
You may not be able to pay off your debts or mortgage now.
You may not have enough equity in your home for a loan. You
may not be able to afford the refinancing costs or home
equity loan costs. You may not be able to lower your credit
card interest rates.
But you can make additional or extra payments.
So how does making an extra payment help lower your interest
charges? Is it going to make next month's bill smaller?
You can't scrape together too much for an extra payment so
how is just $10 going to help when you owe tens of
thousands?
The secret is in making early and consistent extra payments.
For example, on the home mortgage shown above, if you pay an
additional $100 each month you will save over $82,000 in
interest payments. Not only that, but you will also have
your home paid off nine years and two months earlier. You
knock nearly 10 years off your mortgage just by paying an
extra $100 a month.
How does that work?
Well, that $100 extra you pay the first month would have
cost you about $270 in interest to borrow for 30 years.
Since you have paid it already, you can reduce your last
mortgage payment by $270. The next month's extra payment
will reduce your last mortgage payment by $268. Each month
as you pay that extra $100, your final mortgage payment will
be reduced until you won't need to make a final payment,
then the second to last payment, then third to last and so
forth. Soon you will have shaved years and thousands of
dollars in interest charges off your mortgage.
That's great, but maybe you can't spare $100 each month.
How about $50, $25, or even $10? An additional payment of
$50 each month will save you five years and seven months and
about $52,000 dollars. $25 each month will cut your time by
three years and three months saving you about $30,000. Just
$10 a month will reduce your time by one year and three
months and save you over $13,500.
Every little bit helps. Some months you may only be able to
add $10 to your payment; some months you may be able to add
$200. And this applies to interest on credit card payments
or any other kind of debt repayment. Paying down as much of
the principal (or amount you owe) each month will help
reduce the interest you are charged and the length of time
it takes to pay off the debt.
So why don't the credit card companies charge you more of
the principal each month?
How would you like to be making 18% on an investment?
Wouldn't you want this investment to last as long as
possible? Of course! So do the credit card companies.
They are happy for you to pay off your balance, but even
more excited for you to keep paying them that 18% interest.
There are some other interest tips and tricks.
- One trick your mortgage company may have played on you is
to include a prepayment penalty in your mortgage. If you
try to pay off your mortgage early they may actually charge
you for doing so. Or they may only apply part of your
payment to the principal and take the rest as a "service
charge."
- Make sure when you make an additional payment that you
send a check separate from your monthly mortgage payment
with instructions that the amount is to be applied toward
the principal of your loan. Otherwise they may just apply
it towards next month's payment and still charge you the
interest.
- Generally you will not have this problem with credit card
companies. But watch out for late payments or going over
your credit limit. They may then use these "rule
infractions" as cause to raise your rate to over 25%!
- If you are looking to refinance your mortgage, look for a
mortgage that lets you pay on a bi-weekly basis. Since many
people receive a bi-weekly paycheck this also makes it
easier to budget your money. If you are paying every two
weeks you will make an additional monthly payment each year
(26 bi-weekly payments vs. 12 monthly payments). Also,
because you are paying the principal down every two weeks
rather than every month your interest charges will be
reduced.
You CAN take control of your interest charges. Make those
extra monthly payments. The feeling of being debt-free will
far outweigh the temporary pleasure of that burger, movie or
new DVD-player.
About the Author © Simple Joe, Inc.
David Berky is president of Simple Joe,
Inc. One of Simple Joe's best
selling products is href="http://www.simplejoe.com/moneytools/index.htm">Simple
Joe's Money Tools - a collection of 14 personal finance and
investment calculators. This article may be freely
distributed so long as the copyright, author's information
and an active link (where possible) are included.
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