The objective of investing is to increase one's wealth by acquiring property that will generate income and/or appreciate in value over time. People's homes do frequently appreciate over time (however, like other investments, homes can also lose value as some people are discovering in the current depressed real estate market) and they do generate income in the form of providing their owners with shelter which they would otherwise have to pay rent to another if they did not own a home.

For most people their home is their biggest investment. However, since most people do not have sufficient cash to pay for a home, they end up borrowing the money to purchase the home. The most common way to finance residential real estate is by means of an amortized mortgage. Since a mortgage allows a lender to take possession of the property securing the mortgage in the event the borrower fails to make the payments and, since real estate generally, but not always, tends to hold its value, mortgages tend to be more secure than other types of loans which are not backed up with a good asset, lenders generally make mortgages on more favorable terms than other types of loans. The amortization feature of the loan allows the borrower to pay the loan off in equal monthly installments over a period that generally runs from fifteen to thirty years.

Amortized loans are loans in which the first payment is greater than the first month's interest on the full loan. This small extra difference between the borrower's first payment and the interest due is used to reduce the loan balance by a few dollars. The next month the same payment amount is due from the borrower, but because the loan amount has been reduced slightly the interest due is a little less than that due the first month (this is assuming the interest rate remains fixed from month to month) with the result that the difference between the payment and interest due is a little more than it was with the first payment. Over time the interest due continues to decrease and the principal (the portion of the payment being used to reduce the loan balance) portion continues to increase. In the later years of a mortgage, the principal portion of the payment is such that the balance begins falling rapidly and disappears entirely with the last payment.

Because the payment is fixed, any extra payments you make to principle have the effect of reducing the loan balance but do nothing to reduce the payment (this is unlike most credit cards where extra payments result in the card issuer recalculating and lowering the payment) extra payments to the principal accelerate the payoff of the loan because they result in more of each succeeding fixed monthly payment goes to principal each month. When you make an extra payment to principal you are, in effect, paying off a part of the loan that is not scheduled to be paid until the end of the term. Thus, in addition to reducing the loan balance immediately by the extra payment you have also avoided paying all the interest on that amount that you were originally scheduled to pay each month for the next fifteen to thirty years.

For instance, let's assume that you have a loan with a rate of 12% (high for most mortgages today but the math is simpler this way) and that you include an extra $100 for principal with you first payment on a 30 year loan. Ignoring compounding, 12% simple interest on $100 comes to $12 per year or $1 per month. Multiply that $1 per month savings over the next 359 payments (12 months times 30 years = 360 payments over 30 years with 359 payments left after the first payment) and your $100 extra payment results in a savings of $365 worth of interest. This alone results in your extra $100 reducing the balance at the end of the term by $459 ($100 + the $359 interest savings).

But it gets better. With your second month that $1 reduction in interest due is also applied to the principle and you now save the interest that you would have been paying on that dollar with each of the 358 remaining payments. Each month thereafter not only does a dollar less go to interest but also the interest that you would have paid on that dollar and each of the other dollars that you started saving with the second month.

Of course if you continually make an additional payment each month the savings compounds even faster causing your loan to be paid off months or even years sooner than scheduled.

In addition to what many have referred to as the miracle of compound interest (paying interest on interest or, in this case saving interest on interest) there is another factor that allows many people to make this extra payment painlessly and this is a result of a quirk in the calendar. As every school child knows, the year is divided into 12 months of approximately 4 weeks each. The reason I say approximately four weeks to a month is that, if each month were exactly 4 weeks then each month would be exactly 28 days (4 weeks times 7 days per week) and that would work out to a 336 day year (12 months times 28 days per month). However, since a year is actually 365 days (forget about Leap Year for now) this leaves us with an extra 29 days left over (365 - 336 = 29) which is effectively a 13th month in the year. This is important because a large portion of the population is paid weekly or bi-weekly (every 2 weeks) which means they receive 52 weekly or 26 bi-weekly pay checks each year but only make 12 monthly mortgage payments. If you divide 52 weekly paychecks by 12 months you have four paychecks left over and if you divide 26 bi-weekly paychecks by 12 you end up with 2 extra paychecks. Either way, if you take your monthly mortgage payment and divide it by 2 and make one-half of your monthly mortgage payment with each pay check if you are paid bi-weekly or divide the monthly mortgage payment by 4 and make one-quarter of you payment each week if you are paid weekly, you will end up making an extra payment each year. Depending upon your interest rate and whether or not you payment includes amounts for taxes andhomeowners insurance, both of which will cause the extra amount to be higher than if you have a low rate loan where you only pay principal and interest, you will find that your loan will be paid off 30 to 50 percent sooner than if you just make each payment when due. In addition to paying the loan off much faster you will also save thousands of dollars in interest payments on the loan.

Home ownership is a way people can accumulate wealth. With each month's payment the loan balance is reduced and this results in the owner's equity (equity being the difference between the value of the home and the mortgage balance) increasing by the same amount. Accelerating the payoff of a mortgage by paying weekly or bi-weekly rather than monthly is a smart way of investing as it allows one to accumulate equity faster while, at the same time greatly reducing the financing costs.