Average 25yr mortgage charges 75% interest!
Any time you borrow money of any kind, you should always have a strategy in place to pay the debt back as quickly as possible. Understanding interest and how it works with the particular kind of loan you are taking is critical to successful financial management. It’s all math…and simple math at that. Here’s an interesting math scenario for all of you to digest! It may make you think twice about the way you are managing your debts.
For most people, their mortgage is their largest and most damaging debt in terms of interest accrual. Let’s say you borrowed $250,000.00 at 5% interest and paid it back over 25 years. How much interest do you think you would pay on the money your borrowed? How about a whopping $186,000.00!!! If you divide $186,000.00 by the amount you borrowed ($250,000.00) you get the true rate of interest, which is 74.4%!! Can you imagine if the bank told you in the beginning that they would be charging you 74.4% interest on this money? You might have never bought the home in the first place!! Believe it or not, it gets worse!
Currently 37% of mortgages in Canada are amortized over longer than 25 years (in most cases 30, 35, or 40 years). Well, if you used the same numbers as above and paid the $250,000.00 back over 30 years, you would pay 92% or $230,000.00 in interest. A 35 year amortization for that same mortgage will accrue 110% interest ($276,000.00) and a 40 year amortization?? Forget about it!! A 40 year mortgage will accrue an absolutely ridiculous 130% interest!!!
It’s amazing what happens to the way we think, once we are equipped with factual knowledge (in this case real numbers) that allows us to see the true picture. Perhaps before reading this, you didn’t realize the level of importance in paying off your mortgage in the shortest amount of time possible. Do you even know how fast you could become mortgage free given your income and expenses? Most people don’t! I ask people every day when they will be mortgage free and they usually shrug their shoulders and estimate in blocks of years! “Oh, you know, somewhere between 15-20 years”…which is crazy when you consider the cost of not being on the shortest possible path to paying back the principle owing on your mortgage.
The numbers tell us it is possible for the average person, with an average income to pay an average mortgage off in 12 years or less and save 50% of the interest they would have otherwise paid. Now, getting your mortgage under control like this may seem like a scary thing, but it doesn’t have to be. All the education you need is here on this site and if you do not find the answers you need, please drop me a note or comment on the post and ask me…I want to help you.
-Chris
