As a couple looks a homes to purchase, they locate a wonderful home.  It is the right size, a great neighborhood, accessible to everything they need (perhaps even a close drive to Wal Mart.)  The price: $150,000.  Based upon 6% interest rate, the payment is $899.33 (plus taxes and insurance.)

Their friendly bank looks over their income (they both have jobs) and credit history and says they are qualified for a loan of that size.  But when they look at possibilities for the future (including possibly children where they might have reduced income,) they decide they would really prefer to pay less. 

They find a HUD Home in a newer subdivision.  It is appraised at $80,000.  It needs some work, but not too much.  It is not as large or as nice as the first home they were looking at.  But it is okay.  And much more affordable. They put in a bid for $75,000 and it is accepted.  The bank says their payment would be $449.67 (plus taxes and insurance.)  So the buyer asks: "If I were to pay $899.33 per month, how long would it take to pay off this loan?"  The banker punches a few keys on his computer and announces: "Just about nine years."

So they go ahead and pay $900 per month.  If there is a tight month financially, they really only have to pay $449.67.  After nine years, they own their home free and clear.  The home is satisfactory and they could stay there, but they decide to get a larger home.

They go out and look at a new home.  The find a nice one for $150,000.  They sell their other home, netting $75,000 and get a $75,000 loan.  Again the payments are $449.67 per month, but they pay $900 per month.  After nine more years they own the second home free and clear.

So at eighteen years they own their home without any more mortgage payments.  Now they have decisions to make.  Do they upgrade their home again?  They certainly could.  But they decide to invest $900 per month automatically in a mutual fund.  If there is any month that is tight financially, they don't have to invest anything that month.

Had they purchased the first home they were looking at, they would still have twelve more years of payments.  If there is a tight month financially, they would still be obligated to make that payment.

If you would prefer to go for that more expensive home to begin with, that is fine.  We make a larger commission on the more expensive homes. But we want our clients to understand the power of the principles shown here to lead to financial freedom more quickly.

Acknowlegement: This story above is adapted from a similar scenario presented by Lanny Wood.