subject: Do You Know How House Loans Work? [print this page] Home loans are dreadful to someHome loans are dreadful to some. But we all need it. The salesman will tell you that you should get a house as soon as possible, with a loan of course. He even says that it is the most secure investment you will make in your life, enabling you to profit from it many years from now. He even pitches that buying a home for yourself is an investment that will pay multiple fold for you many years from now. How true are those statements?
The salesperson is definitely telling some truth there. But what he is not telling you is you need to settle the home mortgage as quickly as you can. If you can quickly clear your home mortgage loan, you are in for a high return and security.
What do you mean by that? In understanding this, we need to dive into figures and numbers. There is just no other way.
Assume interest totals are counted just based on one year. Only interest figure is used in the following example to make things simple to understand.
Let us say you have a standard mortgage with $100,000 remaining at 6% which pays $60 a year (or $5 a month). Of course, this is to say that $1000 is being borrowed every month, hence the $60. But based on the $100,000, it is $6,000 a year (or $500 a month).
Then you pay back $1,000. What happens is the new interest amount will now be $5,940 a year (or $495 a month).
Comparing the $60 a year saved with the $1,000 would have earned in a bank or building society. That amount of $1000 could have been earning as little as $1 at 0.10 percent. Even if at 3%, it would make $30, which is half of the savings from the loan repayment.
What about income tax on the saving interest? This is where the magic comes in. The money that you save by moving cash into your mortgage account is tax-free. In order to give a fair contrast, it must be grossed up (add the tax back in). For the people who pay taxes at a basic rate, they must earn the equivalent of 7.5% from a normal investment to do as well. On the other hand, top-rate taxpayers will require a super-safe 10% investment return from their money to perform as well.
After the payment, the subsequent years of interests will be reduced until the mortgage is redeemed. In the case of interest rates rising, you will save much more. On the contrary, if interest rates fall, you will keep saving and ultimately this leads to paying more for your home loan.
Some bank accounts which are flexible let you borrow back over-payments. How is this beneficial? You can have your cake of lower payments with the knowledge that you can still eat it later if you need to. If not, you can re-mortgage to a new house loan to increase money from your property if the need arises.
