Compound % in relation to a mortgage

Wouldn't you agree that the largest expenditure most of us make in our lifetimes is our house purchase? So, it would only follow that our housing or our mortgage payment is going to be our largest monthly expense.

In the mortgage industry, the portion of a family’s monthly cash considered prudent for this expense is between 25% and 40% of their gross income. In addition to being the largest expenditure made, it usually requires a very long-term commitment on the part of the homeowner.

Unfortunately, many people who head to their closing to make this huge commitment don’t really understand the financial implications of the POWER OF COMPOUNDING.

To illustrate the power of the doubling effect, let’s imagine for a moment …

Suppose you were offered a job that would last only one month. You were to choose between being paid $10,000 per week or being given a penny the first day, which would subsequently be doubled every day for the remainder of the month. This sounds like a pretty easy choice.

Which would you pick?

Let’s take a look at both options …

At $10,000 per week, you would end your job with a check for $40,000 at the end of the month. Not a bad for a month’s work, right?

If the other payment method were chosen, you’d receive a penny the first day, two cents the second, four cents the third, eight cents the fourth, and so on. The second choice would pay you over $5,000,000 (yes, 5 million dollars) by the 30th day. If you worked in a month with 31 days, you’d have over 10 million dollars!

Um…that’s quite a bit more than $40,000.

Here’s where it really begins to affect you. You have a choice before you sit down at that closing table to buy your house. You can let the bank profit off of your compound interest while you
sit idly back and give them your money.

OR

You can use this knowledge to take advantage of the power of compound interest and use that power to make money for yourself too!

Hmmm…which will you choose?

-adapted from an article by Marian Snow, author, "Stop Sitting on Your Assets"
Her site: http://www.stopsittingonyourassets.com
Her blog: http://mariansnow.typepad.com/assets