What does it mean invest in your mortgage? The first time I heard the phrase it seemed as if you were to become your own mortgage banker. I thought if I could afford to do that, I wouldn't need a mortgage at all. But I was wrong in several ways: Investing in the mortgage didn't mean all of it, and as an investment vehicle it was something I had never considered, to my detriment.
When you invest in your own mortgage you not only make a good, tax free, return but you help yourself in other ways. You reduce your own debt, increase your net worth, and contribute to one of the best retirement plans around -- your free and clear house.
And if that's not enough, you pay your mortgage off quicker and do not have to make another mortgage payment ever again. (That certainly seems obvious, but believe me it is overlooked by most people. I guess their light doesn't get to the end of the tunnel.)
Let's look at how the investment works. If you have a 30-year fixed and you want to invest your money, and the amount you wish to invest equates to the difference between a 30-year payment and a 15-year payment, you have one half of the equation. The other half is the difference in amortization between a 30-year and a 15-year (loan pay down) you will get on a yearly basis. Now you can figure out your return. You can do this on a yearly basis, a 5-year basis, or over the life of the new loan -15 years.
Using real numbers, a $350,000 loan amortized over 30 years would have a payment of $2,116 a month with a rate in the low 6% range. That same loan amount amortized over 15 years would have a payment of $2,893 a month with a rate in the high 5% range. The difference in payments is $777 a month, which would be your investment. That investment would be $9,324 a year.
Below is a chart showing you the year-by-year profit on your investment:
|YEAR||ANNUAL DIFFERENCE IN PAYMENT||DIFFERENCE IN AMORTIZATION||ANNUAL NET AFTER RETURN OF INVESTMENT|
TOTAL NET PROFIT IN 15 YEARS
I have already covered what happens after the payoff in my column from August 29,2006, "Why it is Important to Take the Right Mortgage". A review of that article will reinforce the idea of investing in your mortgage. You need to also read the column from August 15, 2006, "Retiring the Retirement Plans" to understand the additional benefits from this investment.
Does the investment have to be done with a 15-year loan from an original 30-year loan? Absolutely not. You can take any amortization and lower it to any other: 20 year to a 15 year; 15 year to a 10 year, or even a 10 yr to a 5 or 7 year arm and pay it off during the 5 or 7 year fixed period. The idea is to consider a non-conventional way to invest your money and reap not only a good return, but also a number of other benefits. One of the unmentioned major benefits is that the return is guaranteed and you have control over the investment. It is your house and your money and most of all YOUR decision!
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.