Myths That Keep Homeowners from Investing in Their Mortgages

Myths That Keep Homeowners from Investing in Their Mortgages:

Myth: It sounds too good to be true.

The truth: We admit it. Anything that promises to save you big bucks sounds like a get-rich-quick scheme. And we've all been warned to avoid deals like that. However, investing in your mortgageeven minuscule amountsreally does reap great rewards. It's no gimmick.

Myth: I can't afford to pre-pay.

The truth: If you borrowed that $100,000 at 8% for 30 years and sent in only an extra 25 cents a day, you'd save $7,986. A dime a day would save $3,317. Can't afford dimes this month? Send in pennies, but get into the pre-payment habit! Figure out where you can cut back, even just a little. Then send in what you can, when you can, and turn your biggest debt into a profit center. You'll save a pile and at the same time give yourself the peace of mind that owning your home free and clear can bring.

Myth: I can get a better return someplace else.

The truth: Maybe you can! In terms of traditional investments, if you have a good 401(k) plan at work with employer matching, take full advantage of it. But in general, the greater the return, the greater the risk. And there's nothing safer than investing in the roof over your head, or rather, the mortgage on it.

Myth: I'll lose my only tax deduction.

The truth: It's not your only tax deduction, assuming you itemize. You'll still be able to take write-offs for property taxes. Tax deductions may ease the bite, but they don't make paying interest a profitable venture. The more interest you pay, the less money you'll keep.

It never pays to send your lender $1 in the hopes of getting back 28 cents or so from the IRS. Anyway, higher standard deductions mean that the first $7,100, (as of the 1998 tax year) spent on a couple's mortgage interest could be saving $0!

Even if you itemize, pre-paying pays. Say you send in $25 a month more during just the first year of our sample $100,000 mortgage. Because of compounding, that $300 in advance payments will save you $2,808 in interest over the loan's lifeeven if you never pre-pay another cent.

But in that first year, you'll only pay $11.26 less in interest than had you not pre-paid. For someone in the 28% federal tax bracket, that would increase the tax burden by $3.15. Where else can an investment of a mere $3.15 return $2,808, guaranteed?

Myth: My bank will be angry if I pre-pay.

The truth: (a) Banks don't have feelings, and now that everything's computerized, there probably won't be anyone at the bank who even knows that you're pre-paying. (b) These days, banks make much of their mortgage profits up fronton points and closing costs. (c) When you pre-pay, the bank accumulates money with which to make new loans (which brings us back to "b").

Myth: I'm probably going to be moving in the next few years, so pre-paying doesn't make sense.

The truth: While homeowners do tend to move every five to seven years, they generally go from one mortgaged home to another, creating what we call a serial mortgage. Unique to each borrower, these loans are made up of the various mortgages a family takes out over the years.

Regardless of how often you move, every dollar you invest in your mortgage will earn you money at the rate you're currently paying. Have an 8% fixed-rate loan? Your pre-payments will yield 8%.

If you keep pre-paying, no matter what home loan you have at the moment, the ultimate result will be an early escape from mortgage debtmeaning years of mortgage payments you'll never have to make.

All along, you'll have more options for the next house, and the next. For example, you'll be able to put more money down on the next new housebecause your pre-payments on the old one mean you owe less. You may decide you can afford a bigger houseor you might want to lighten your load with a smaller mortgage. You'll have a choice, and someday, your home will actually be yourswhile your neighbors will still have decades of payments left to be made on their most recent homes!

Myth: I'll get hit with a pre-payment penalty.

The truth: Pre-payment penalties are rare. Even when they can be imposed, most banks don't bother. Penalties on small pre-payments are so tiny, it'd cost the lender more than they'd collect to do the bookkeeping and billing.

And while we're on the subject of bookkeeping, you'll be happy to know that these days, lenders almost always credit pre-payments correctly. However, to make certain that there will be no confusion, include a note with your first few pre-payments that says something like, ''Please credit the additional amount I've sent in this month to the outstanding principal balance on my loan."

If you want to make sure the lender is properly crediting your pre-payments, run out a schedule with The Banker's Secret Software, or get us to run one for you.

Myth: My banker says my pre-payments will be subtracted off "the back end of my loan."

The truth: What you send in today immediately comes off the amount you owewhether or not your banker understands how the math works. Since you owe less, more of next month's mortgage payment will go toward reducing your balance, while the amount that goes toward interest will decrease. Your loan will cost you less and be paid off earlier because you've pre-paid.

Myth: Pre-paying is so complicated, I'll need to hire someone to do it for me.

The truth: Nonsense! Although there are a lot of ads out there for biweekly conversions or other mortgage-acceleration programs, they're expensive and absolutely unnecessary. Send in what you can, when you can, and watch your home equity grow!