The first 5 years of your mortgage are the most critical. The general rule of thumb is that you spend at least 5 times more on principal than on interest. You can calculate the numbers yourself at http://www.bankrate.com
Banks hope you won’t break free of this cycle and have designed mortgage tables to lock you into paying interest over a longer period of time.
To get ahead of your mortgage…
…it’s important that you have a basic understanding of your mortgage’s amortization schedule so that the banks don’t take advantage of you and suck you into payments for life.
HEY!
I know this may sound strange, but nothing in life is constant.
Chances are you’ll eventually move, need to borrow money from your mortgage, pay for kids’ education, or take out a reverse mortgage when you retire. Knowing how your mortgage works will help you make those important financial decisions.
Let’s take a closer look at an example.
For a $334,000 mortgage at a 6.3% interest rate, you’ll end up paying approximately $774,252.88 in payments over 30 years.
You will spend $410,252.88 in interest and $334,000 in principal.
That sounds fair enough, right?
At approximately year 21, you will pay 50% of your mortgage. So over the last ten years you will still owe $167,000.
Can you see what’s going on?
For the first 20 years you work for the bank. Most of your hard-earned paycheck goes toward interest.
what sucks!
Let’s take a closer look at the first 5 years of your amortization schedule. You will notice that you spend $22,068.33 on principal and $101,973.82 on interest.
For a total refund of $124,042.15, you would pay approximately 82% in mortgage interest compared to principal.
This made me feel bad when I found out about this for my mortgage.
So where did it leave me and what does this mean to you?
You really start to make a small dent in your mortgage after the first 8 years.
Please don’t take my word for this. You can go directly to http://www.bankrate.com and check this out for yourself if your mortgage balance has changed. Pay close attention to your outstanding balance and how much of your monthly payments is applied to interest right now.
At the 21st year mark of your monthly mortgage payments, more of your money will go toward principal than interest. Your hard-earned paycheck would finally start working for you.
There are two key numbers to understand when it comes to your mortgage.
- The first 5 years, in which you would normally pay five times more in interest than in principal, is the first key milestone.
- The second key point is in year 21 when you still owe at least 50 percent of the principal on your mortgage.
It is interesting to know that at age 21, you pay less interest and in the last 10 years you get little or no tax deduction for the interest on your mortgage.
To make a dent in your mortgage, the first barrier you must break is the five to eight year mark. Once you get past this, a little more of your cash goes into equity and you start to build some momentum.
Imagine if you refinanced or bought a new house.
The process starts all over again and you are stuck in a life of payments.
Now, this is how banks actually make money by lending your funds to buy a house.
They count on a landlord like you to move in within the first 8 years or refinance your home. The more times you do this, the cycle begins again and you end up paying a significant amount of your money in interest.
The goal is to break this barrier.