Pay Off a $113k Mortgage in 6 Years for
$20k?
A colleague of mine met a client for coffee last week. During their conversation, they got to talking
about the future and his client shared that his youngest son would be out of
high school in 6 years. Once his son was out of school, he wanted to travel
more with his wife but didn’t think he would be able to because of the mortgage
payment on his house. He had 15 years to go on his mortgage and is currently
paying around $1,200 per month. His outstanding mortgage balance is around
$113,000.
A
quick online search to a loan amortization calculator showed he
would have to pay approximately $1,800 each month to have his mortgage paid off
in full in 6 years based on his existing terms. This new monthly payment is
just a little over $600 more than he is currently paying each month. For him to
pay off the mortgage with extra monthly payments, he would need to invest
$43,200 over the next 6 years.
Since
his main goal is to pay the mortgage off, we suggested a different approach
designed to save him a significant amount of money while accomplishing the same
goal. The suggestion was for him to buy two mobile home investments for cash
and use the income from these two mobile homes to make the additional mortgage
prepayments payments each month.
In
most cases, an investor in my area can buy a mobile home which rents out for $500-$600
a month for $8,000 to $10,000. 1 to 2 mobile homes (depending on price &
condition) with these numbers would provide an extra $500-600 a month of income.
He could use this investment income to make the monthly $600 mortgage
prepayment.
The
two families living in these two mobile homes will pay $7,200 a year towards
his mortgage for the next 6 years. In total, these prepayments amount to the
same $43,200 he would have to pay out of his pocket to pay the mortgage off
early. By buying the two mobile homes instead, he would be saving $23,200 off
his cost to prepay the mortgage. ($43,200 total prepayment cost – $20,000
he invested for the two mobile homes). Plus, he would be eliminating $35,974 of
interest by paying the mortgage off in 6 years vs. paying the mortgage off over
the remaining 15 year term.
This
one idea to buy two mobile homes for $20,000 could generate a total return of
$59,174 in the next 6 years. This return is determined by adding the $23,200
saved through the mobile home investments to the $35,974 of interest saved by
prepaying the mortgage. This return on
investment is 195% in 6 years, for an average annual return of 32%.
Many
people don’t think prepaying a mortgage is a good investment. They believe that
the funds used to prepay the mortgage could be invested into better investment
opportunities. This plan actually solves this challenge by inserting a higher
return investment before the mortgage prepayment and this dramatically improves
the total return on investment and helps him accomplish his goal with
significantly less out of pocket. What
are your thoughts?
If you have any questions, please give me a call/text me at 719-229-5770 or send an email to me at: realtorjuanita@gmail.com
Looking forward to helping you!
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