The recent introduction of high amortization mortgages was originally intended to help buyers qualify for mortgages. In effect, it made it easier to get a higher mortgage based on the same amount of income that would have qualified you for much less based on a 25 year amortization. For the most part, the train of thought has been that if you can afford to qualify based on a shorter amortization, you should probably take the shorter option such that your mortgage is paid off quicker. Well, that is a good theory, but there are other more lucrative options should you be willing to look for them.
For example, the title of this post indicates that by amortizing your mortgage over 40 years, there is the potential to make $3,000,000. This is indeed true, if you are willing to look at the situation from a different angle than most. Lets look at the following example.
You have two mortgage options for a property that you are about to buy. Both mortgages are for $350,000 at a rate of 5.9%. The only difference is that one option is to choose a 40 year amortization, the other option is a 25 year amortization. If you pick the 25 year, you pay off your house quicker, you pay less interest over the life of the mortgage, but you make a higher payment. The opposite is true for the 40 year amortization. It takes you longer to pay off, costs you more in interest, but your monthly payment is lower.
The situation looks like this.
40 Year Amortization
Monthly Payment: $1,884.13
Interest Paid: $554,389
25 Year Amortization
Monthly Payment: $2218.56
Interest Paid: $315,569
As you can see, with the 40 year amortization you will pay approximately $238,820 more in interest, thats a lot of money!
You will also notice however, that you will pay $334 less a month with the 40 year mortgage. What does that mean to you? Nothing, if you choose to just spend that $334 somewhere else on things that will not make you any money.
But, what if you decided to take that $334, and have it automatically withdrawn from your account every month and invested into a mutual fund that yields on average 12%. If you re-invested your earnings and continued to invest the $334 for the entire life of the mortgage, you would have a total of $3,240,141 in the bank on the day your last payment was made.I personally think that the $238821 I would have to pay in additional interest is well worth the $3 million dollars I would make in the long run.
The key would be to make the withdrawal automatic, and consistent over the entire life of the mortgage.
This is the power of leverage combined with the power of compound interest, which together can make you a lot of money.
Of course, there are two people you need to consult before you put this plan to action, a mortgage broker like myself, and a financial adviser who can make the investment side of the transaction work as well.
