Amortization

look-both-waysThose of us with mortgages repay the original loan with interest over a period of years. A 6% loan of $100,000 amortized across 30 years requires monthly payments of $599.55, and the lender stands to receive $215,838 on that loan. The borrower eventually gets to keep the property he could live in or rent for a steady income.

Instead of borrowing $100,000, one could save and invest a portion of his earnings and eventually use it to fund retirement needs. At 6%, the income on $100,000 would be $6,000 a year: $500 a month. That person would probably die with the $100,000 in his account.

If instead he were able to amortize $100,000 at 6% across the rest of his life expectancy—let’s say another 30 years—he could plan on receiving $599.55 a month with nothing left at the end of the 30 years.

Add a zero: $1,000,000 generating $5,000 monthly interest income at 6% would instead provide $5,995.50 a month if amortized. Not bad.

And yet… while almost no one blinks at amortizing a mortgage loan to someone else’s advantage, many of us overlook the implications of amortizing our nest egg to our own advantage.

It pays to look both ways.