Mortgage Repayment Trap – Why the first five years of your mortgage are set to work against you
The first 5 years of your mortgage are the most critical. The general rule is that you spend at least 5 times more principal than interest. You can check the numbers yourself http://www.bankrate.com
Banks hope you won’t break free from this cycle and have designed the mortgage tables to trap you paying interest for a longer period of time.
To get ahead of your mortgage…
…it’s important to have a basic understanding of your mortgage repayment schedule so banks don’t take advantage of you and suck you into payments for life.
I know this may sound strange, but nothing in life is permanent.
You’ll probably move at some point, need to borrow money from your mortgage, pay for children’s education, or take out a reverse mortgage in retirement. Knowing how your mortgage works will help you make these important financial decisions.
Let’s take a closer look at an example.
For a $334,000 mortgage at an interest rate of 6.3%, you’ll end up paying approximately $774,252.88 in repayments over 30 years.
You’ll spend $410,252.88 in interest and $334,000 in principal.
That sounds pretty fair, right?
At approximately age 21, you will have paid off 50% of your mortgage. So over the last ten years, you would still owe $167,000.
Do you see what’s going on?
The first 20 years you work in the bank. Most of your hard earned salary goes towards interest.
Let’s take a closer look at the first 5 years of your depreciation plan. You’ll notice that you’re spending $22,068.33 in principal and $101,973.82 in interest.
From a total payment of $124,042.15, you would pay approximately 82% mortgage interest compared to principal.
It made me feel bad when I found out about my mortgage.
So where does that leave me and what does that mean for you?
You really start to make a small dent in your mortgage after the first 8 years.
Please don’t take my word for it. 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 payments are being applied to interest at that time.
In year 21 of your monthly mortgage payments, more of your money will go toward principal than interest. Your hard earned salary will finally start working for you.
There are two key numbers to understand when dealing with your mortgage.
- The first 5 years, where you would normally pay five times the principal in interest, is the first key point.
- The second key point is at age 21, when you still owe at least 50 percent of the principal on your mortgage.
It is interesting to know that after 21 years you pay less interest and for the last 10 years you get very little or almost no tax relief on your mortgage interest.
To make a breakthrough on your mortgage, the first barrier you have to overcome is the five to eight year mark. Once you get past that, a little more of your money goes toward principal and you start to gain momentum.
Just imagine if you refinance or get a new home.
The process starts over and you’re stuck with a lifetime of payments.
This is how banks really make their money by borrowing your money to buy a home.
They rely 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 up paying a significant amount of your money in interest.
The goal is to break through this barrier.
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