Mortgages Can Be Short-Term As Well
Considering that the average term for a mortgage is twenty five years, calling it short-term finance can be crazy. We are, after all, talking about repaying hundreds of thousands of dollars. The truth is though that you can actually pay your home off in years rather than in decades by going about it in a clever manner.
What most people fail to take into consideration is that interest makes up about seventy percent of your total loan instrumental. You actually end up paying more interest than you do capital over the full life of a typical bond. And that is great news – the interest rate offered on bonds is very attractive. Paying more than you need to means that you pay the bond off much faster and save a lot of money.
To understand why, you need to understand about compound interest. Let us say that in month one, your installment is $1000 and your interest is $700. You are effectively only reducing your bond by $300, not the $1000 you paid. The following month, the interest is calculated in the amount, less $300. Over time, this adds up.
NOw lets say that you pay in an extra $100 a month – your interest portion this month is still the same but next month will be slightly less. And so on and so forth. What some people do to take full advantage of this is to pay their wages into the bond. The funds are then used as and when needed but, in the meanwhile, the capital amount that the interest is calculated on comes down as well. As long as you have an access bond, you can make the system work for you instead of against you. Then, even without paying a cent over and above the minimum, you are saving in terms of the interest paid. Throw in a few hundred dollars a month extra and you have a very potent savings vehicle.
IN fact, paying in $100 a month from day one over and above your normal installment can bring down your bond term to 27 years. Imagine what a few hundred dollars a month can do. This kind of moves all the power back into your hands again, doesn’t it? Pay extra wherever you can and see how a mortgage can become a short-term loan, without you needing to have won the lottery. It just makes sense when you look at it this way, doesn’t it?