Monday, May 7, 2007

Why pay more?

I was having a discussion with my wife last night and the subject of our debt and mortgage came up. My interest was further peaked on this topic when I saw a blog article from Might Bargain Hunter regarding an unusual fixed mortgage. From my perspective, borrowing money is a necessary evil. Why pay more for a product than its advertised price if you don't have to? Mortgages, unlike other debt, have the distinction of being tax deductible. But again, why would I pay two or three times the value of my home to a bank just to keep a couple thousand of my pay from the IRS?

We talked a bit about our mortgage, and how much we would save if we just paid $100 extra. Our escrow account adjusted last month - we had a shortage because of an insurance fiasco (long story) and now are paying $50 less a month since the escrow account has now balanced out and is paid up in full. Instead of reabsorbing that into our spending, I've kept paying the bank an extra check with instructions to apply it to the principle. It's only $50 a month but it's better than nothing. And why not? We were already accustomed to saving the full mortgage payment and it doesn't affect our budget to continue doing so. Further, it saves us tens of thousands of dollars.

My wife was shocked to hear how much we would save in interest by paying just $100 extra, and how early we would have the house paid for. Imagine investing that mortgage payment, I told her. With our current savings plans (which at present will already give us a million by the time we reach 65) we would be able to invest and save that mortgage payment for another 10 years, ending our payment to ourselves and letting the money sit and stew for another 10 years until retirement and we'd have another quarter million, a good $50k more than we'd have if we just invested that $100 every month for the next 40 years. A little less if you include the extra taxes we'll be paying for the 10 years without a mortgage.

Borrowing money isn't in our best interests. We want to pay cash for everything that we can, which is one reason why we are not going to stop paying our car payment after our current auto loan is paid off. We'll save it for our next vehicle. That alone will save us thousands. And our mortgage? Why pay more when we don't have to? Even if we just broke even by paying early as opposed to investing the extra money now, we have the satisfaction of owning our home outright.

Banks make enough from real estate anyway. Since the average person moves something like every 5-7 years, all those young 30 year amortized loans raking in interest off the same home as it is passed on from owner to owner is a perpetual income for the banking industry.

I'd rather give extra money to the government. At least they build roads.

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