Mortgage Pay Off Trap – Why the First Five Years of Your Mortgage is Set to Work Against You
February 22, 2017
The first 5 years of your mortgage is the most critical. The general rule of thumb is that you spend at least 5 times more in principal than interest. You can run the numbers for yourself at http://www.bankrate.com
The banks’ hope you won’t break free from this cycle and have designed the mortgage tables to trap you into paying interest for a longer period of time.
To get ahead of your mortgage…
…it is important you have a basic understanding of your mortgage amortization schedule so that the banks don’t take advantage of you and suck you into a lifetime of payments.
I know this may sound strange but nothing in life is constant.
Chances are at some point you will move, need to borrow money from your mortgage, pay for the kids education or take out a reverse mortgage in retirement. 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 will end up paying approximately $774,252.88 in repayments over 30 years.
You will spend $410,252.88 in interest and $334,000 in principal.
That sounds pretty fair right?
At approximately year 21, you will pay off 50% of your mortgage. So in the last ten years you will still owe $167,000.
Can you see what going on?
For the 1st 20 years you are working for the bank. Most of your hard-earned paycheck goes towards interest.
Let’s take a closer look at the first 5 years of your amortization schedule. You will notice that you spend $22,068.33 in principal and $101,973.82 in interest.
Out of a total repayment of $124,042.15, you would pay approximately 82% in mortgage interest as compared to principal.
This made me feel sick when I found about this for my mortgage.
So where did it leave me and what does this mean to you?
You really start making 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 for yourself if your mortgage balance has changed. Pay close attention to your outstanding balance and how much of your monthly repayments are applied to interest at this point.
At the year 21 mark of your monthly mortgage payments, more of your money will go towards principal than interest. Your hard-earned paycheck would finally begin to work for you.
There are two key numbers to understand when dealing with your mortgage.
- The first 5 years, where you would typically pay five times more in interest than principal, is the first key milestone.
- The second key point is at year 21 when you still owe at least 50 percent of your mortgage principal.
This is interesting to know that at the 21 year mark, you pay less in interest and in the last 10 years you get very little to almost no tax deductions for your mortgage interest.
To make a dent in your mortgage, the first barrier you need to break is the five to eight year mark. Once you get past this, a little more of your cash goes towards principal and you begin to build some momentum.
Just imagine if you refinance or take out a new home.
The process starts all over again and you are stuck in a lifetime of payments.
Now here is how the banks really make their money by lending your funds to buy a home.
They count on a homeowner like you to move within the first 8 years or refinance their home. The more times you do this, the cycle starts all over again and you end paying a significant amount of your money on interest.
The goal is to break through this barrier.