Friday, August 24, 2007

Good Article of the Week

I have decided while reading many other blogs that I would like to pick out one or two articles each week that catch my eye and talk about them.

This week, Advanced Personal Finance wrote an article titled "The Cost of Prepaying." In this article the author writes about how they prepay thier mortgage even though they are told it is not the financially "smart" thing to do. The author figures out some math and comes up with a number of $78,000 cost for prepaying his mortgage. However, this is based on certain assumptions like getting an 8% return from the market for your money that could or could not happen.

I agree with the author in this article. Anyone who has read a book by David Bach (The Automatic Millionaire), knows he is an advocate of paying off your mortgage early. By making one extra payment a year you can decrease the life of a 30 year mortgage by 8 or 9 years or something like that and save thousands of dollars. Bach doesn't figure out how much you would have if instead of making that extra payment, you put that money into the market and earned a higher return. I don't think he needs to. There are a couple reasons I like the idea of prepaying your mortgage. Keep in mind I don't have a mortgage so I can't actually do this yet and my mind may change when I do buy my first house. But for now, I like the idea of prepaying your mortgage because for one, I hate debt. I don't like knowing I owe someone else money. I am prepaying my car and I will prepay my mortgage. By prepaying I am going to save thousands of dollars in interest and will be able to stop paying 8 years earlier then if not prepaying. At that point, I will continue to make these payments, however they will go to myself instead of the bank.

Another reason I like the idea of prepaying is brought up in the article. If I have a mortgage with 7% interest, then I know I am saving 7% on my money by prepaying. Lets say I take that $1,500 extra payment and put it in the market instead. Well, I will need to be sure that I am going to earn over 7%. I can't be sure of this. If I could be sure then I would take my emergency fund which pays me 5% and put it into the market. No one is telling you to do this. Why not take the sure return instead of gamble for a couple extra points return in the market? Why not build my equity faster and owe less to the bank when and if I decide to sell? If I decide to stay, then I completely own the home sooner and feel better about myself. In the end isn't that all that is important? Money is a good thing and I am obsessed with it. But like they say, money can't buy you happiness. I need to do what makes me feel the most comfortable and secure. In the end, I think I will have the most security if I don't have debts hanging over my head. Let me know what you think!

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