When you get a home loan, you’re number one goal should be to pay off that loan as quickly as possible. Obviously, you don’t have any real equity in the house as long as you’re just paying interest. And the way these loans are set up, you’re paying little more than interest for the first several years. In other words, if you get a 30-year loan, you can make three or four years of payments and end up only having a few hundred dollars worth of equity in your house. That’s the way the loans are designed. They are designed to extract as much money from your pocket as possible over the life of the loan.
What you want to do is start paying off this loan early. You can do that by sending extra money to the mortgage company, or by making your payments with greater frequency. For example, instead of sending$1000 once a month to your mortgage company, you might send$500 every two weeks. It actually does make a difference because you’re avoiding interest on the money for that additional two weeks.
You are far better off, of course, making a payment that is larger than$1000. So if you can afford it, send in$1100. Or maybe even something ambitious like$2000. That additional$1000 in payment will probably save you$20, 000 over the life of the loan. It’s true! The cost of dinner today, if you use it to help pay off your house, can save you$1000 down the road! That’s not an exaggeration. Do the math and you’ll see it yourself.
People who are financially savvy already know this. But what they may not know about is something I can only characterize as an extremely dishonest practice by mortgage companies. Here’s how they trick consumers and take their money without paying down the actual principle balance of the loan:
Let’s say your monthly payment amount is supposed to be$1000. And suppose that’s$900 of interest and$100 of principle. But instead of sending$1000, you think’Hey! I’m going to save some money down the road. So I’m going to send in$1500.’ In a normal sane world, you would suppose that$900 goes to pay interest, $100 goes to principle, and then the extra$500 that you sent should also go to pay down the principle. But that’s not the way that mortgage companies think about these things.
That would be too unprofitable for the mortgage companies. They have to devise a system - a con - to extract more money from you even though you’re trying to pay down the balance. So here’s what they do. They will take that extra$500 you’ve paid, and instead of applying that to your principle, they apply it as a pre-payment of your next month’s interest.
Let me repeat that. Instead of using that$500 to pay down your principle, they are applying it as a prepayment against the next month’s interest. In other words, you’ve sent them a$1500 check, but you haven’t gotten any real credit whatsoever for the extra$500 you’ve sent in terms of principle. According to their books, you’ve just prepaid part of next month’s payment. And of course, if you pay extra the next month, they will apply that to the subsequent month.
So they’re playing a shell game with your money. And a lot of mortgage companies do this. If you’re not financially sharp, you may not notice it’s happening at all. You send in the money, you think they’re applying it in the right way, but they don’t. And 10 or 20 years later, you end up owing a lot more than you should owe, thanks to these shell games by mortgage companies.
So what can you do to defend yourself against this unscrupulous tactic used by some of the largest banks in the world? Well, it’s simple. Keep track of your principle each and every month. If you send in an extra payment, you should know how much extra principle should be paid down. You may have to call your mortgage company and demand that the extra payment be applied to principle only. Then, next month, when you get your statement, make sure that they have applied it appropriately.
And if they keep messing with you and playing this silly game of smoke and mirrors, then refinance your house with an honest company. Switch to a company that has the ethics to carry an honest loan. And by the way, just because you’re banking with a so-called’reputable’ bank, it doesn’t mean they’re not going to play this trick on you. Lots of big name banks pull the same shenanigans on consumers every single day. Why do they get away with it? Because most people aren’t sharp enough to crunch the numbers and figure out what’s happening with their money.
And people trust big banks. They think just because a bank has a big name and runs a big ad and has a big building, that they must be trustworthy. In fact, this isn’t necessarily true. Let’s face it, a lot of the banking practices out there are simply dishonest. But on the other hand, banking does have an important role to play in society. Without banks, we wouldn’t be able to leverage the use of capital in the way that has spurred the prosperity we now experience in our relatively free market economy.
So I’m not against banks, or banking practices in general. I’m just against dishonest banks and banks that try to screw consumers in order to squeeze another few bucks of profit out of people who can’t do math.
You may have heard the lottery described as a tax on people who can’t do math. And that’s probably true, because in most cases, playing the lottery is a very poor financial decision. And home mortgage shell games, like the one I’ve described here, can also be a tax on people who can’t do math. My advice is learn how to crunch the numbers, learn how to calculate interest rates, understand your mortgage, get the vocabulary down so you can talk about principle versus interest and pre-payment penalties and so on. Educate yourself about your money or you’re going to be surrounded by companies who will be more than happy to help you part with it.