Which is a better option – Investing in a mortgage or in any other type of investment?
by: carlmeyer
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Word Count: 586
How can one make more savings by using his own mortgage? How can be a mortgage used as an investment? We all have heard about investments in bonds, government tax free bonds, stock funds and certain annuities in which we can invest our income every month. Let us take a look at some of the options in which you can invest your money.
A small investment can be really useful
You can start off by investing a small amount which you can keep aside after making your monthly payments on all your debts. Now the question arises, where do you invest that extra cash you have? You need to make sure that your investment is safe and also the investment is easily accessible when you would like to withdraw. So, you need to consider all the available options, understand them and then decide upon the one that suits your needs.
Ensuring that your investment is safe
Most of us have always given more importance to put our savings into banks. We considered it as a security because even if the bank becomes insolvent, our investment would be safe. This is because the Federal Deposit Insurance Corporation would insure it for up to an amount of $100,000 . But the problem is that the interest we get from such a bank saving goes up as high as a mere 5.5%.
Alternative investment options like stocks or bonds
Normally the bonds if held up to maturity is worth their face value but often do fluctuate because of interest rate changes. Also, problem arises if you need the money back in the meantime. The income you receive is also taxable and the principal that will be returned can be subject to capital gains calculations.
Does a mortgage give a better return?
Let us go through an example to show how it would be much more advantageous to invest in the mortgage itself that is to pay extra each month and repay the loan early. Let’s assume that you have taken a mortgage loan of $100,000. We consider it to be a fixed rate loan with an amortization period of 30 years and an interest rate of 7%.
If you wish to pay off the loan in 30 years, your monthly payments come out to be $665.31. But you wish to pay it off early and in this regard, you pay $25 dollars extra towards the monthly payment. In doing so, you can repay the loan in 26.9 years or 321 months. So, you can save an amount equal to the total monthly payment for (360-321) = 39 months. In all, you save $(39 * 665.31) = $25, 947.
Now, in order to pay off the loan early, you have made an extra payment of $25 on a monthly basis. So, in all, you have made a total extra payment of $(321*25) = $8025. Your net saving is equal to $17,922 ($25947 - $8025).
Your monthly saving through extra payments is $55.83 ($17,922/321 months). The annual saving comes out to $669.96 ($55.83*12 months).
By paying extra towards the loan, you are investing yearly $300 ($25*12 months). So, your average yearly return on the investment is 223% ($669.96/300 *100).
Thus, when you invest in a mortgage, you are able to get a return worth more than 100% whereas in other types of investment, you can hardly get such return. Therefore, it is often wise to invest in a mortgage rather than in other types of investments.
About the Author
Carl Meyer specializes in helping homeowners take the right decisions regarding their mortgage requirements. In this article he has tried to show how the money spent on mortgage can be leveraged and find the proper way of earning income out of it.
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