Nelson Nash says, “If you know what the problem is, you’ll know what to do!” The difficulty is that we struggle to understand the problem because financial education is severely lacking, and the little education we have is received from suspect sources that may not have our best interest in mind.
Americans have been conditioned to focus primarily on interest rates. So, we put our money in the bank and then shop for the best loan rates we can find to finance our homes, cars, and lifestyles.
As a real estate professional, I see this regularly. My clients go to the closing table to buy a new home and if their rate is 6.75% (maybe due to good credit) instead of 7% or 7.5%, they believe this is a win. A good closing attorney will show them the fifth page of their Closing Disclosure (CD) detailing the fees associated with financing required under the Truth in Lending Act, but it often receives little to no real attention and we move on to signing.
Interest in Action
Consider this snapshot from a recent client’s CD on a home with a modest purchase price of $320,000 at 6.75%. The total amount they will have paid for their home after 30 years including principal, interest, mortgage insurance and loan costs as scheduled is equal to $720,208.43. The finance charge alone on this home will cost them $425,400.53. This is a Total Interest Percentage (TIP) of 133.9%. Curiously enough, we don’t see banks advertising this number on their signs out front!
| Total of Payments. Total you will have paid after you have made all of the payments of principal, interest, mortgage insurance, and loan costs as scheduled. | $720,208.43 |
| Finance Charge. The dollar amount the loan will cost you. | $425,400.53 |
| Amount Financed. The loan amount available after paying your up front finance charge. | $282,328.48 |
| Annual Percentage Rate (APR). Your costs over the loan term expressed as a rate. This is not your interest rate. | 7.66% |
| Total Interest Percentage (TIP). The total amount of interest that you will pay over the loan term as a percentage of your loan amount. | 133.903% |
Essentially, most who buy a home on a 30 year fixed rate mortgage are buying one house for themselves and another one with upgrades for the bank! It is further exacerbated by the fact that the average homeowner in America moves every 3-5 years. The vast majority of interest on an amortized loan is paid in the beginning years, thus, we are caught in a continuous cycle of paying a tremendous amount of interest to someone else’s bank.
As Nelson says in Becoming Your Own Banker, “He thinks he is buying a house, but all he is really doing is making the wheels of the banking business and the real estate business – in that order – turn.”
We don’t stop to think about the volume of interest that is leaving our personal economy every month. Does that mean you shouldn’t buy a home on a 30 year fixed mortgage? No, of course not. Homeownership is important on many levels. Take a moment to calculate not only the volume of interest that is leaving your pockets every month on a home loan, but also a car loan, student loans, credit cards, personal lines of credit or any other loan you may have outstanding.
According to Nelson Nash, the average American is paying 34.5 cents of every dollar in interest to someone else’s bank.
How much would it help your personal finances if instead of paying that much money to someone else, you could recapture some or all of that interest back into your own economy? Welcome to the Infinite Banking Concept, because that is exactly what I am happy to show you how to do.
Let me help you get started becoming your own bank.
