Compound Interest Example: Now, let’s say you’re going to need a little more time to repay the loan. Let’s say you need 30 years (typical mortgage) to repay it.
$100,000 * 6.5% * 30 years
So, your banker punches the numbers and says, “OK, here’s your monthly payment.”
- Monthly payment = $632.07
- This is where most people stop. All they care about is the monthly payment. “Sure, I could afford that! That’s only $632.07 per month!”
But are they looking at the big picture? Keep reading the loan terms.
- Total borrowed = $100,000
- Total interest = $127,544.49
- Total payments = $227,544.49
- Monthly payment = $632.07
OK, wait a minute. Who in their right mind would pay $215,839.19 for something that cost $100,000? Apparently we all would. You will pay more in interest than you borrowed if you make all your payments on time. That’s how a mortgage works, and that’s what people pay.
But it doesn’t have to be that way.
Let’s look at another example. Let’s say you go shopping for some shoes and find some shoes for $100.
Now you notice that there is a special promotion! These shoes are on sale! So you look at the price tag:
OK, who in their right mind would spend $215 for a pair of $100 shoes? Crazy. Yet that is exactly what most of us do every day, except with our most expensive purchase.
Most people will pay more interest on a home than they pay for the home itself. (They can afford the monthly payment!) That’s because most people don’t understand interest, and most people don’t understand how interest works, and most people pay interest. That’s because most people aren’t operating with FI (Financial Intelligence).
Your home is likely your life’s biggest investment. If you don’t know what you’re doing, and if you don’t have FI, your home can also be your most expensive investment.
Read on for TIPs on how to make your home your life’s absolute best investment!