David Bach who appears on "The Millionaire Inside" on CNBC, recommends signing up for the bi-weekly mortgage. Doing so, he says that will help you become wealthy because you will payoff your 30 -year mortgage as much as seven years early.
This program takes your monthly mortgage payment and adjusts your payment to half the amount, but a payment is made every two weeks. He fails to mention this adjustment causes you to pay a 13th payment each year and it is this extra payment that causes your mortgage to be paid off early. The question becomes, "Is this a good thing or is there a better way?"
While this may sound appealing because your mortgage is paid-off years earlier and you avoid paying years of interest, there is another option. Taking the extra payment and invest those dollars in a moderate objective mutual fund most likely will prove to be the better choice. In todays low mortgage interest rate environment, I believe investing the extra dollars will provide greater benefit in the long run. To illustrate the results lets look at a $200,000 mortgage at 6.25% for 30 years. The monthly payment would be $1,231.43, principle and interest. Paying an extra $90 per payment would pay this mortgage off after 299 payments or 61 months early.
If you were to pay the normal mortgage amount but invest the $90 per month, the results I believe would be better. At the end of 299 payments, you would still owe $64,211.99. But your investment could be worth substantially more. Had you invested in American Balanced fund, even after paying the commission, $90 a month invested for the last 299 months would be worth $151,768. You could withdraw from the investment account to pay off the mortgage and still have a substantial balance. If you were to ask yourself which does a better job of creating wealth, I believe the answer is obvious.
There are issues with both options. Paying extra on the mortgage does create more equity on your home. If you are not careful, this may open the door to taking an equity loan on your home and thus defeating the benefits of paying extra on the note. Investing the $90 also opens the door to pulling the money out to do something else, like a new fishing boat, or a new loaded pickup, or a new addition to the house. For either strategy to work, you must be willing to leave the created equity or the investment alone. That requires discipline and occasionally our discipline may take a leave of absence.
Phil Town is another promoter of creating wealth. One of the things I have heard Phil say to audiences is that mutual funds do not make you money. Security licensed professionals have to be very careful of what they say to audiences because of the expectation of the audience. Non-licensed individuals have far more freedom to say what they want, and thus you should be very careful of the advice you follow from non-licensed promoters or spokes persons. Phil Town promotes buying and selling individual stocks primarily and states mutual funds make more money for themselves than their shareholders.
Per Morningstar® there are more than 2,000 funds with a 15-year history and 416 funds returned the same or better performance than the S&P 500 index. In the last 10 years, there have been more than 1,715 mutual funds that have performed equal to or better than this index.
Unless you are in the securities industry, most likely your knowledge and expertise cover other services, duties, or jobs.
Teaming up with a professional will be the best direction you can take. Listening to TV pitches may benefit a few, but most often the one making the pitch is benefiting more. There are many sound strategies that will help you create long-term wealth. The Certified Financial Planner as well as other financial professionals have been educated to assist the public in creating wealth. You should find a professional you are comfortable working with and create a long-term relationship.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, SIPC.