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

Borrowing $200,000 over thirty years, for example, with a 5% APR would create a monthly payment of about $1074. Over the next 30 years, you will actually fork out an additional $186,640 in interest for a grand total of $386,640!

If you could find an extra $246 a month, and fork out $1320 a month into the mortgage, you'd cut 10 years off the mortgage payment period - the loan would be fully paid in only 20 years. You would save $69,756 over the course of the loan and reduce your total payments to $316,664.

Of course, the title of this article is not "Why You Should Fork Out More Each Month" and it is about actually handing over less each month. So, now I am going to show you why handing over extra each month, while better than making regular payments, is not the best way to pay off your house and actually make money. The major flaw with what the banks and financial advisors are preaching is that it does not take into account the "time value" of money.

That said, let me first explain why financial advisors and the banks preach what they do before we get into the time value of money. With the banks, it's pretty simple! your paying your mortgage faster means less risk to them and it gives the opportunity to lend the money to someone else. On top of that, banks always pick the homeowners that have PAID MORE money toward their mortgage when they decide who to foreclose on because it exposes them to less risk. This is completely the opposite of the belief that the bank won't target people that have paid more money. In actuality, homeowners are actually safer from foreclosures when they OWE MORE money.

The prime example of this is the Hilton Hotel empire. When homes were being foreclosed on left and right during the Great Depression, the Hiltons, even though they fell behind on their payments several times, did not have one property foreclosed on. Basically, they made sure that the banks would not target them since they owed so much money (and still do since they never pay off their properties.)

I really have no idea why, when it comes to financial advisors, that they tell their clients to go this route. They know that the banks first target those that have paid more money. Finally, having their clients pay off their mortgage actually costs their clients and themselves (because they get paid by making their clients money) a ton of lost profit because of the time value of money.

Just about every single person knows that money was worth more when they were younger because of inflation. If you take that $1074 mortgage payment, for instance, in 30 years time, when the last is due, it would only be worth $437 in today's money.

A dollar today is always worth more than a dollar a year from now! or 10 years from now! or 100 years from now.

So, in our example, how does the time value of money affect everything?

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 fixed at a 5% interest rate and with a mortgage payment of $1074 is $200,066.

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

Both are equal.

The $69,756 "savings" 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.

On the other hand, what would happen if you took that same $246 each month and invested it elsewhere?

If you could get an average return of 10%, after 20 years you would have $186,804 (Note: the S&P 500 has averaged 10.83% over the last 50 years and would make an S&P 500 Index Fund a safe yet powerful choice.) With inflation at 3%, that would be worth $102,597 in today's money.

Now let's ask the question we asked once before to get even more answers. Surely, the longer the income stream lasts, the better, right? So why would the banks recommend that you pay off your mortgage more quickly?

Banks love to prove that they will "save you money" and make it seem like they are doing it only for your benefit. But in reality, the average Joe simply doesn't understand the time value money as well as the banks do. The banks know the true value of that extra $246 a month that you're giving them now is much greater now than it will be in the future.

There are some good arguments for paying off your mortgage faster like building your equity. However, you should fully understand that every dollar that you give the bank is a dollar that you cannot invest elsewhere.

Why give up your right to have your money safely and conservatively make you 10-30% to save 5%. Doesn't that sound pretty stupid? I put my clients into wealth building mortgages every single day that actually enable them to pay off their house in about 14.5 years and walk away with about $60,000 extra for every $100,000 that they initially borrowed!

Finally, many people have a misconception about the wealthy that I want to dispel. Most unwealthy people believe that wealthy people don't have mortgages and that they own their homes 100%. The fact of the matter is that most do not own their homes free and clear because they understand that their money can make them more money in other investments rather than sitting in the walls of their homes. Major corporations like Home Depot and Coca-Cola don't own the land that they operate on and Bill Gates took out a mortgage for his new $65,000,000 home (which he could have easily paid cash for, right?) So, why is Joe Average so eager to pay off his mortgage faster?

Of course the title of this article talks about actually lowering your monthly mortgage payment while building wealth at the same time and I would love to show you how to do exactly that. If you would like to know how to cut your monthly mortgage payment while at the same time build your wealth then please be sure to contact me.

Ed Brancheau is a mortgage financing guru who can teach you to decrease your payments, pay off your mortgage faster and create wealth. Call him at 310-770-2369 for more info.