Repay Your Mortgage As Slowly As You Want

Repay Your Mortgage As Slowly As You Want

For years, banks and financial advisors have been recommending that you pay extra cash into your mortgage, to cut down the huge interest amount and reduce the period over which you pay back the loan.

For example, if you borrow $200 000 over 30 years at a rate of 5%, your monthly repayments would be around $1074. Over 30 years, you would actually pay $1074 x 360 (months), which is $386 640.

That's $186 640 in interest!

If you could find an extra $246 a month, and pay $1320 a month into the mortgage, you'd cut 10 years off the repayment period - the loan would be fully paid in only 20 years. Moreover, your total payments would be $316 664, saving $69 756!

The flaw in this technique is that it ignores the time value of money. It is almost easier to look into doing debt consolidation.

Everyone knows that money is worth less now than it was when they were younger. If you take that $1074 mortgage repayment, for instance, in 30 years time, when the last payment is due, it would only be worth $437 in today's money.

A dollar now is always better than a dollar in a year's time, or in 10 year's time.

How does the time value of money affect our example?

You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage. What you need to do is calculate the Present Value of each mortgage.

The Present Value of a 30 year mortgage with repayments of $1074 at a 5% interest rate is $200 066.

The Present Value of a 20 year mortgage with repayments of $1320 at a 5% interest rate is $200 066.

The two repayment schemes are exactly equal.

The $69 756 'saving' in the interest rate is really just the effect of adding the extra $246 a month into the repayments - in fact, that $246 a month adds up to $59 040 over 20 years.

What if you took that $246 a month and invested it in, for example, mutual funds?

If you could get a return of 10% p.a., after 20 years you would have $186 804. With inflation at 3%, that would be worth $102 597 in today's money.

Why would the banks recommend that you pay off your mortgage quickly? Surely the longer the income stream lasts, the better?

The banks love being able to prove that their recommendations will 'save you money'. But in reality, the banks do understand the time value of money. They know the true value of that extra $246 a month that you're giving them now, not in the future. And the shorter the time you take to repay the mortgage, the lower their risk, and the sooner their money comes back to them to be loaned out again.

There are some arguments for paying your mortgage back quickly - for one thing, the quicker you pay, the quicker your equity grows. But you should understand that every dollar you give the bank now is a dollar that you can't invest.

Giving your money to the bank to avoid paying 5% interest means that you can't use that money to earn 10% or 12% or 15% somewhere else.

How US Military Logisticians Fight the War on Excess

How US Military Logisticians Fight the War on Excess

While US military logisticians constantly work to ensure vital supplies reach the intended end user, sometimes they are required to retrograde, or to get rid of, excess equipment. Some planners call this operation a “war on excess.” But, it's better than trying to get a 2nd Mortgage. Where does all this extra material come from? Is it the byproduct of poor logistics planning? And how does one gage the volume and scope of such a war on excess?

First of all, it's important to understand and realize that several factors play an important role in the accumulation of excess military equipment – some of it planned and some of it consequential. The downsizing, or right-sizing of a unit's mission may require less equipment to perform the mission. A shift in mission focus from one area to another may play a role. And certainly, mission accomplishment may also lead to excess equipment that has served it's useful purpose.

So why not just ship the equipment back to it's point of origin? Well, several considerations come into play when determining the appropriate disposition of equipment that has been classified as excess. One of the main considerations is whether it is cost-effective to ship the equipment back to it's point of origin.

If, for example, a piece of equipment has reached, or is closely approaching, the end of it's useful life-cycle it may not be cost-effective to retrograde the equipment simply to junk it once it reaches it's destination. For pieces of equipment that fall into the “close to end of useful life-cycle” category, the excess equipment may be scrapped on location or sold locally in accordance with military regulations.

Another consideration that leads to the build up of excess equipment is a change in unit mission. In this situation, logisticians may deem it cost-effective for the departing unit to leave their equipment in place and have the newly arriving unit it replaces “fall-in” on the equipment left by the departing unit.

However, the new unit's mission may make at least a portion of the equipment left behind superfluous and not required to carry out its mission. Again, the end result is an accumulation of excess equipment. A change in a unit's authorized table of distribution and allowances (TDA) can instantly cause a huge amount of excess equipment. This typically occurs when a unit is restructured to perform a different mission than it was previously required to accomplish.

If more equipment is needed for the new mission, based upon an enhanced TDA, then logisticians work to fill the equipment void. If the TDA requires less equipment for the unit to meet its objectives, then you've got another case of excess military equipment. The closure of military base camps and accountability inventories associated with such events typically turns up huge quantities of military excess.

Base camp closures typically represent mission completion or downsizing and the need for the logistician to determine what will be done with excess equipment that is no longer needed. Developing such plans presents a particular challenge to logisticians who, on the one hand are asked to dispose of excess equipment and, on the other, to find a suitable use and cost-effective disposition of equipment to other users who have a bona fide need for the excess.

It's a juggling challenge that can only be met by understanding the causes of military equipment excess, and also understanding the needs of the organization as a whole. This ensures that only the best disposition plans are developed and implemented.