4 ms·

What about when I pay a lot of my mortgage early? Say, within a few years?

by sown 17y ago

basman 17y ago
In the limit, that's like buying the house with cash up front, which amounts to betting that the appreciation will exceed any investment income. For example, given person A who paid cash for a house a year ago and person B who put that money into an index fund, in most parts of the country B would be much better off right now.
qeorge 17y ago
I'm not a homeowner, but I believe most mortgages are "frontloaded", at least to some extent, so you're paying off the interest before you pay off the principle. Its not uncommmon to pay ~2x the principal in interest. So I couldn't say for sure, but I don't see it having a huge impact.
- teuobk 17y ago
  Mortgage payments are usually calculated to be equal over time. Therefore, a greater proportion of the early payments goes to interest, but a greater proportion of the later payments goes to principal. Payments in excess of the set payment amount are generally applied to the principal. Thus, making payments in excess of the set payment amount early in the life of the loan will reduce the principal faster than expected, and the total interest paid for the loan will be reduced.
earl 17y ago
Then you're placing bets on inflation vs home price appreciation that are, at best, difficult to predict.
philwelch 17y ago
The mortgage is structured for a given term. If you pay off a 30 year mortgage in 2 years, you're still paying 30 years worth of interest. There's no gain, in fact, you lose because you lose the time value of money. Paying straight cash for a house, or buying a house on a small fixed interest and a short term already baked into the mortgage, can gain you something. Paying off an existing mortgage early gains you time and the psychological benefits of not worrying about making the mortgage next month. If you're about to die, it lets your descendants take their time selling the house if they can't afford to make the payments.
- gaius 17y ago
  That is not true. Well, it might be in some specific cases but in the UK at least it's perfectly normal for a lender to impose no penalties for early- or over-payment. Our mortgage market is extremely competitive however (that amplified the effect of the housing bubble).
  - philwelch 17y ago
    Mortgages vary, but it's been known to happen It's not a penalty per se, it's just that if you pay twice as much as your next monthly payment, all you gain is an extra month before your next payment is due. It's not a free-floating line of credit--it's an agreement that you will pay this amount per month for 30 years, and there are no discounts for going faster than the schedule requires. Think of it in this way: as an investment, I'm making a secured loan to you from which I am expecting a given return over the next 30 years. If you're excited to pay me off in 5 years instead of 30, maybe we can make a deal (quite often there's refinancing involved in that arrangement) but I got into this deal expecting 30 years, not 5 years, of interest at that rate, and you agreed to that, too.
    - gaius 17y ago
      Certainly a mortgage like that would be a very hard sell in the UK. As in, you'd probably have to offer it only to risky customers. My mortgage provider gives me a choice if I overpay a lump sum: I can reduce the term and pay the same monthly, or reduce the monthly payment and keep the term. It's a simple calculation really, how many customers will actually pay off their mortgages early vs how many customers you will attract by offering the option to do so.
    - sokoloff 17y ago
      Do you actually have (or have you read the terms on) such a mortgage? Any additional amount I send in on mine is credited as "additional principal payment" and reduces the amount owed (and hence the interest). If I had <mumble> thousand dollars in hand, I could pay my mortgage off Monday without any penalty, just five MONTHS into my refinance. I have seen no-refinance-before-such-date mortgages, and while it's possible that a mortgage with a prepayment of additional principal penalty or barring exists, it's certainly not common in the US.

What about when I pay a lot of my mortgage early? Say, within a few years?

by sown 17y ago

What about when I pay a lot of my mortgage early? Say, within a few years?

In the limit, that's like buying the house with cash up front, which amounts to betting that the appreciation will exceed any investment income. For example, given person A who paid cash for a house a year ago and person B who put that money into an index fund, in most parts of the country B would be much better off right now.

qeorge 17y ago

I'm not a homeowner, but I believe most mortgages are "frontloaded", at least to some extent, so you're paying off the interest before you pay off the principle. Its not uncommmon to pay ~2x the principal in interest. So I couldn't say for sure, but I don't see it having a huge impact.

teuobk 17y ago
Mortgage payments are usually calculated to be equal over time. Therefore, a greater proportion of the early payments goes to interest, but a greater proportion of the later payments goes to principal. Payments in excess of the set payment amount are generally applied to the principal. Thus, making payments in excess of the set payment amount early in the life of the loan will reduce the principal faster than expected, and the total interest paid for the loan will be reduced.

earl 17y ago

Then you're placing bets on inflation vs home price appreciation that are, at best, difficult to predict.

philwelch 17y ago

The mortgage is structured for a given term. If you pay off a 30 year mortgage in 2 years, you're still paying 30 years worth of interest. There's no gain, in fact, you lose because you lose the time value of money. Paying straight cash for a house, or buying a house on a small fixed interest and a short term already baked into the mortgage, can gain you something. Paying off an existing mortgage early gains you time and the psychological benefits of not worrying about making the mortgage next month. If you're about to die, it lets your descendants take their time selling the house if they can't afford to make the payments.

gaius 17y ago
That is not true. Well, it might be in some specific cases but in the UK at least it's perfectly normal for a lender to impose no penalties for early- or over-payment. Our mortgage market is extremely competitive however (that amplified the effect of the housing bubble).
- philwelch 17y ago
  Mortgages vary, but it's been known to happen It's not a penalty per se, it's just that if you pay twice as much as your next monthly payment, all you gain is an extra month before your next payment is due. It's not a free-floating line of credit--it's an agreement that you will pay this amount per month for 30 years, and there are no discounts for going faster than the schedule requires. Think of it in this way: as an investment, I'm making a secured loan to you from which I am expecting a given return over the next 30 years. If you're excited to pay me off in 5 years instead of 30, maybe we can make a deal (quite often there's refinancing involved in that arrangement) but I got into this deal expecting 30 years, not 5 years, of interest at that rate, and you agreed to that, too.
  - gaius 17y ago
    Certainly a mortgage like that would be a very hard sell in the UK. As in, you'd probably have to offer it only to risky customers. My mortgage provider gives me a choice if I overpay a lump sum: I can reduce the term and pay the same monthly, or reduce the monthly payment and keep the term. It's a simple calculation really, how many customers will actually pay off their mortgages early vs how many customers you will attract by offering the option to do so.
  - sokoloff 17y ago
    Do you actually have (or have you read the terms on) such a mortgage? Any additional amount I send in on mine is credited as "additional principal payment" and reduces the amount owed (and hence the interest). If I had <mumble> thousand dollars in hand, I could pay my mortgage off Monday without any penalty, just five MONTHS into my refinance. I have seen no-refinance-before-such-date mortgages, and while it's possible that a mortgage with a prepayment of additional principal penalty or barring exists, it's certainly not common in the US.