For some time now, lenders and mortgage brokers have been recommending that you make additional principal payments toward you mortgage, to reduce the high interest amount and reduce the number of payments necessary to amortize (pay off) the loan.

   If, for instance, if you borrowed $200,000 for a term of thirty years with aninterest rate of 5%, your monthly mortgage payments would be approximately $1,074. Over the life of the loan and you would end up paying 1074 x 360 (months), i.e.,$386,640.  Of which an astonishing $186,640 is all interest!

   Now, what If you could afford an additional $246 a month so that you would be paying $1,320 per month. By doing so you would effectively knock off ten years off the term of the mortgage and would completely pay off your Naples FL mortgage in only twenty years -- instead of thirty. More importantly, the sum  your payments would be significantly reduced to only$316,664, saving you $69,756!

   While this is a nice feature and one which may seem attractive to you, there is one problem in that it ignores inflation and the time-value of money.

   I'm sure you'll agree with me that your dollars are worth substantially less today than they were  10 to 30 years ago, right? Well, if you take that same $1,074 mortgage payment discussed above, for example, thirty years from now, when  you are making the very last payment, it would worth a paltry $437 in today's dollars.

   Historically, money today will  buy more than it will a year later, or ten year's later.

How will the time-value of money principle affect our example?
   You need to consider not only the raw savings gained from prepaying interest, that is, you can't just subtract the home loan interest amount for a twenty year mortgage from the mortgage interest on a thirty year home loan. This would ignore the very real principle of time-value of money. (and you don't want to do that, do you?) What you must first do is to calculate the Present Value of each home loan.

   In our example, the Present Value of a thirty year loan with monthly payments of $1,074 at a five percent interest is $200,066. While the Present Value of a twenty year home loan with monthly payments of $1,320 at a five percent interest rate would be $200,066.

    Note that both repayment plans are precisely the same.

   Thus the $69,756 so called saving in the interest rate is really nothing more than the result of adding up the additional $246 per month into the payments - Bottom line, the $246 per month adds up to $59,040 over the twenty year term.

   Lets see what happens when we take that same $246 per month and invest it in, the stock market? Well, if you were able to get a 10% return over r the twenty years, you would then have $186,804.  Considering inflation at three percent, the $186.04 would actually be worth $102,597 in today's dollars.

   If this is true (and I submit to you that it surely is), why would lenders suggest that you amortize your home loan fast? And, by he way, lenders are generally happy to try and point out to borrowers their advice that you accelerate payments to 'save you big money'. However, just the opposite is true. Lenders more than anyone completely comprehend the time-value of money principle. Lenders know the real value of the additional $246 per month that you're giving them in today's dollars, not in the future dollars. You see, the quicker you pay back the Naples FL home loan, the lower the bank' s risk will be, and the quicker their dollars are returned (i.e., paid back) the sooner they can lend them out again to another borrower.

   In the end you really must consider the time-value of money principle. That said, some borrowers enjoy the comfort of  having he mortgage completely paid off.  But, in my opinion you'd be trading off that warm fuzzy feeling for real dollars -- and that's OK, so long as you are aware that the trade off is that you loose the ability to invest those dollars you used to gain equity.