Financial security starts with understanding types of debt. Good debt is debt that you have that pays for itself. A rental property or business that you own pays for the loan you took out for it is an example; your money is not going into it. This is the defining line. Bad debt is just about any debt that most of us have and includes credit cards, mortgages, loans for school (contrary to what some of us may have been told), cars, etc. I’m not saying that you shouldn’t take out loans for school or a house but just that it’s bad debt and should be paid off quickly. Banks have spent massive amounts in marketing to convince us that these bad debts are actually good.
Do you know if you take a mortgage on a $200,000 house at six percent for thirty years that you will pay at least an extra $200,000 in interest? So in 30 years, you’re house is hopefully worth $400,000 which means you made NO return on your investment, you broke even. If your house is worth less than your total loan plus interest cost, you lost money! If you don’t believe me, look at a loan amortization schedule. A better plan is to pay it off as soon as you can to save on the interest. How can you do this? Pay an extra one or two payments a year towards principal or larger lump sums. This will decrease the loan period from thirty to fifteen years or less. Let’s think about it for a second. Let’s say your monthly payment is $1,500 month. As you pay your mortgage, you pay down your principal with the extra payments. As you pay the loan down, more of your money goes towards the principal and less to interest. After fifteen years making one extra payment per year, you would pay an additional $22,500 towards your house. That means you gain an additional $22,500 in equity AND save in interest payments by paying off your loan sooner. Say you also save $45,000 in interest payments by paying down your principle with the extra payment. That means you just made a little over 100% on your money!
I know it’s hard to grasp but it’s true. By doing some simple math, you can find out for yourself how the numbers line up. This is a powerful tool for you to realize. Banks lose money when you pay your mortgage off early because of the lost interest income. Take this advice and you’ll be one step ahead of the game. Imagine what will happen when you pay off your house in fifteen years and invest the money that would have gone towards your mortgage into other areas! How do you become wealthy? This is one of the major ways.