Effective Interest Rates

Remember the feeling of excitement when you were heading to the closing table to purchase your first home? Exciting, on top of the world kind of a feeling would probably describe it well! Then you got to the closing and your Title Company or Attorney showed your the Truth in Lending Disclosure. When you saw what you will pay back to the bank in interest, you almost choked on that lump that immediately formed in your throat, right?!!!

Well, most might say to you "welcome to the world of mortgage financing! And, up until recently, my response was something to the effect that if you dwell on that fact, you will never purchase anything! But in reality, people continue to buy a payment. They look at what they can afford each month and based on the total of their Principal, Interest, Taxes and Insurance. Many times, people will base the amount of their down payment upon where they want their monthly payment to end up. I have heard the term "buying the monthly payment".

And sadly, most people either refinance or sell the home after only five years.Now there are a lot of mortgage brokers out there that will tell you that a fixed rate of interest is just that. I tell you that they do not understand a truth in lending disclosure. That can be a topic for another day, however for today's topic and because you are paying mostly interest in the first five years of the loan, your effective rate of interest is much, much higher than you might ever imagine. Take a 200,000.00 loan for example. After only 5 years, you would still owe 186,108.00 and if you paid off the loan, the effective rate of interest would be approximately 81%. Read the Asher Intitute Consumer Guide for the Banking Industrys Biggest Secret. It will help you to understand how the lender caluclates interest and how you the consumer is at a serious disadvantage. I am going to tell you how you can help yourself to get out of debt quicker than you might expect possible!

One way that you can increase your equity and reduce your mortgage principal is to pay additional money to the pricipal each month or better still, make two payments every January, one going directly to the principal. In effect, you just made 13 payments, which is what you do when you sign up for a bi-weekly program. If you do not have the discipline to send the additional money each month or once a year, the bi-weekly plan forces you to make those payments. And, the good news is that it will pay off your mortgage, in about 6 years less on a thirty year mortgage!

In my next post, I will discuss another way to pay down your mortgage. Stay tuned!