Your Mortgage Payment—A Hidden Source of Savings

When you have a mortgage, there is a hidden source of savings in your mortgage payment.

In the first year, about 25% off your payment comes back to you in the form of increased equity in your home. For example, if you have a $500,000 loan at 5% interest over 30 years, your monthly payment is going to be $2,684 dollars a month. Of this amount, about 23%, or $617, is money that is coming back to you as savings by increasing the equity in your property.

On a yearly basis this translates as follows: during the first year, using the above example, you have managed to save $7,377. In addition, you have generated a tax deduction of $6,953 during that year.

Some people would object to this and say that you can save much more using a brokerage account, a savings account, or any other type of investment. However, experience has shown that unless you make savings a necessary expense, even if you have the money, saving is a very difficult ting to do for most people. Yes, you can make more money with a brokerage account; yes, you will be able to save more if you use an investment vehicle; and yes, equity in your home is not easily accessible.

However, if you don't make savings a necessary expense—if you don't convert the act of saving into a bill—for most people, being able to save is out of reach. This is why after a few years most homeowners are amazed at the amount of equity they have accumulated.

Between year 15 and 16 of the mortgage the amount of money going into your equity is about 50% of your monthly payment. From this point on, it is not advisable for you to refinance or get another mortgage. From this point on, you start to pay yourself more than what you are paying in interest.

In addition to forced savings and a tax deduction, you also, as a homeowner, get the potential of value appreciation. This means that your home can go up in value in the market, regardless of the debt that you have on it.

So, even though a primary residence is not necessarily an investment per se, if you do nothing but keep up with your mortgage payments, you are creating a source of savings that can result in future wealth for yourself and for your family.

Your mortgage should not be your only source of savings, but when compared to for example rent, even though generally speaking the amount you pay on the mortgage tends to be higher than the amount you will pay in rent for the same property, you get more out of it than out of paying rent. Rent only buys you 30 days of living on the property. A mortgage buys you savings, tax deductions and the possibility to benefit from the appreciation in your home’s value.