Extra Mortgage Payments: Do They Save You Money?

In 2004, we bought a house for $304,000 with no down payment and a 30-year mortgage at a 4% annual interest rate. This set our monthly mortgage payments at $1,451.34. You can verify these figures using mortgage calculators like the one available on Dollartimes.

Fast forward 16 years, and the value of our house had risen to $434,453.

Like any homeowner, we had to insure our property. The yearly cost for our insurance was about $2,000, which is pretty standard. You can find more information on typical homeowners insurance costs on financial websites such as Bankrate.

Home Maintenance Impact on Resale Value of Home

Maintaining a house is crucial to keeping it in top shape, and we certainly didn’t skimp on this. We invested in various upgrades over the years, including remodeling the bathrooms and kitchen, replacing carpets, painting inside and out, updating the vinyl, and enhancing the patios, sidewalks, external buildings, and landscaping. On average, homeowners spend about $9,081 a year on maintenance and improvements, a figure supported by several home improvement websites.

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Salem Home Mortgage Payment Example

Our house was in Salem, Oregon, where the property tax rate was $16.70 for every $1,000 of a property’s assessed value, leading us to pay $4,175 in property taxes annually.

Had we kept the house for 16 years, we might have expected a significant increase in equity due to rising property values. For instance, the difference between the purchase price ($304,000) and the current value ($434,453) suggests a potential gain of $130,453. However, when you break down the expenses over the years, the reality looks quite different:

• The current value of the property was $434,453.
• Subtracting the total mortgage payments made, which amounted to $278,657.
• Deducting the total spent on insurance, which came to $32,000.
• Taking off the total maintenance costs over the years, which added up to $145,296.
• Removing the total property taxes paid, totaling $66,848.

After considering all these expenses, the outcome is a loss of $88,348, not a gain of $130,453.

Imagine if, instead of putting that $1,451 monthly payment towards a mortgage, we had invested it in a participating whole life insurance policy over those 16 years. The outcome would have been quite different:

• We’d have a guaranteed cash value of $322,742.
• The policy would include a guaranteed death benefit of $1,713,239.
• Plus, there would be no additional costs involved.

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It’s true that everyone needs a place to live, and buying a home often seems more appealing than renting. However, this personal story is shared to illustrate that the market value of a house can be unpredictable. Meanwhile, the costs of homeownership are certain and can eat into the actual value of your property.

Understanding this, putting extra funds into a participating whole life insurance policy, rather than quickly paying off your mortgage, can be a smarter financial strategy. It offers a level of security, promising that eventually, the value you can draw from the insurance will surpass the amount you’ve invested in it. This kind of assurance is something homeownership can’t guarantee, especially when considering the costs tied to owning a property.

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Let McFie Insurance Help You Decide

At McFie Insurance, our goal is for you to retain more of your hard-earned income, ensuring your financial stability. It’s important to base your decisions on solid information rather than the often misleading advice from so-called financial experts. Being informed can lead to significant savings, which could be the key to a comfortable retirement instead of one where you’re worried about outliving your resources. Give us a call or schedule a meeting so we can help you.

Dr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of McFie Insurance which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.