scott@opus.UUCP (Scott Wiesner) (08/30/84)
I'm buying a condo. It's my first home, and I've got a question
about the payments I'll be making. The early payments will be
mainly interest. (I've printed an amortization table for my payments).
I know I get to deduct those interest payments, but I assume it's
better to not have to pay them at all. Now, if I throw in an extra
$100 or $200/mo on my early payments (say, for the first 10 or so)
I'll be paying off the principle with that extra money, so I'll sort
of get to "cross out" several of my payments, and start with the
following ones. This way, a larger portion of my money (per payment)
is going toward principle and less toward interest. This is sort
of equivalent to making a bigger downpayment and getting a shorter
term loan. Is making larger payments like this a good idea in the
early part of the loan? The advice I have heard in the past says you
want to put as little money as possible into investment properties,
but you want to put as much money as possible into your home.
Now, I realize I might not have explained this as clearly as I should
have, but I think you get the idea.
--
Scott Wiesner
{allegra, ucbvax, cornell}!nbires!scottjohnson@saturn.UUCP (Mark Scott Johnson) (08/31/84)
There are, as usual, several schools of thot on the issue of prepaying
the mortgage on your personal residence. The primary argument in favor
of prepayment is that you "save money" over time. (In my opinion, this
is really only true if you intend to pay off the entire mortgage--which
very few people actually ever do. After all, your payments only *stop*
sooner; they don't go *down* with prepayment. ARMs might be different.)
The other big argument in favor of prepayment is "financial security":
You don't need to worry about deflation making your payments huge in
relation to your decreased buying power, for example.
The primary argument against prepayment has nothing to do with the change
in distribution of your payments between interest and principle (altho
that is a secondary argument). Rather, the rationale is that if you have
a good, assumable loan, your chances of selling your house on the best
terms are directly proportional to the principle balance on your mortgage.
(Think about how eager current buyers are to pick up houses with assumable
loans under 10%. In many part of the country owners of such houses can
"name their own prices".) But who's to say this will continue to be true?
[By the way, even if you're a believer in imminent deflation (very popular
in financial circles these days), you may still not want to pay off your
mortgage. Traditionally, in deflationary times the value of real estate
declines. The decrease in value of your house comes out of your equity
first (remember, banks lose on inflation but win on deflation, loan-wise).
The more equity you have, the more *you* lose before the bank starts losing.
Of course if you're a *real* believer in deflation, you won't even *think*
of owning real estate!]
Not prepaying probably makes most sense if 1) you intend to keep the house
under 10 years, 2) you believe inflation is more likely to occur within the
next 10 year than is mild deflation, and 3) "owning it free and clear" does
not have a particularly strong emotional ring to you. Otherwise, prepaying
is probably wise for you, if you have the money.
But whatever you do, READ YOUR LOAN PAPERS! Some banks impose prepayment
penalties if your prepayments exceed a certain threshold per month or per
year. I've even heard of banks that consider additional monthly payments
to be prepaid *interest* (even tho the IRS probably won't let you deduct it
as interest) instead of prepaid *principle*! If this is your case, it make
virtually no sense at all to prepay unless you're prepared to sue the bank
over this clause in your loan contract.
--
Mark Scott Johnson
CSnet: Johnson@HP-Labs
ARPAnet: Johnson%Hp-Labs@CSnet-Relay.arpa
USENET: {allegra,decvax,ihnp4,ucbvax}!hplabs!johnsontbul@trsvax.UUCP (09/06/84)
#R:opus:-76000:trsvax:52900025:000:1332 trsvax!tbul Sep 6 12:16:00 1984 < Upgrade your VAX to a TRS-80 > There are several things to consider. First, with all the fuss about a flat tax system, you may NOT be able to deduct those interest payments. That's a sure pity for people who love to borrow. Next, if you want to buy a house and intend to sell it soon, put little down payment and don't pay ahead. That way you get maximum leverage on your money. For example: case 1: cost of house $10,000 down payment 2,000 sell house for 11,000 You've made a $1,000 profit on a $2,000 investment - that's 50% case 2: cost of house $10,000 down payment 5,000 sell house for 11,000 You've made a $1,000 profit on a $5,000 investment - that's 20% In case 1 above, you maximize your leverage and get a high rate of return. Please note that should you sell your house for less than what you bought it for, that leverage would work against you in the same way. If you plan to keep your house forever and ever (and then some), make as large a down payment as you can and try to prepay as much as possible. In this way, you will pay corresponding less interest because you principal is smaller. Of course, your loan agreement must let you prepay... Thomas Bulkowski "Find an aim in life before you run out of ammunition." - Arnold Glasow allegra!convex!ctvax!trsvax!tbul Fort Worth, Texas
jcp@brl-tgr.ARPA (Joe Pistritto <jcp>) (09/07/84)
I have dealt with this problem before, and do make 'extra payments' of principal only on my home mortgage. Of course, you leverage the most money by putting most money in at the beginning. By putting in $100 or so a month, I managed to cut something like 17 years off my 30 year mortgage. -JCP-
wb@gamma.UUCP (Bill Beblo) (09/25/84)
A not so recent article in Changing Times magazine dealt specifically with this question. Although there are always exceptions, the article concluded that prepaying a mortgage was roughly equivalent to investing that perpayment at the mortgage rate. In other words, if you can find an investment with a yield higher than your mortgage rate you'd probably be better off putting your money there rather than prepaying your mortgage.