Do you pay extra on your mortgage?

Discussion in 'After Hours Lounge (Off Topic)' started by Drew Bethel, Nov 3, 2003.

  1. Drew Bethel

    Drew Bethel Screenwriter

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    I read something in a financial journal that if we make an extra mortgage payment per year we can pay our house off in 22 years and also save a lot in interest.

    Qustion is, would you benefit more from writing an extra cheque for your mortgage every year or taking that same amount to open an annual IRA account - not sure if their are income restrictions for IRAs or not.
     
  2. Patrick Sun

    Patrick Sun Moderator
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    I re-financed last year, but I still pay the same amount each month, so I now pay much more in principle per month than before, which should accelerate building more equity in my house. I'm now paying around 3x the monthly principle by paying the same amount before my re-financing.
     
  3. Scott Merryfield

    Scott Merryfield Executive Producer

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    Since mortgage interest in tax deductible, depending on your tax bracket, the after-tax interest rate on a 6% mortgage is probably somewhere around 4%. So the question is whether you can earn more than 4% investing that extra monthly amount elsewhere. For what it's worth, the financial advisor we use always recommends against paying extra principal each month.

    Another thing to consider is how long you plan on being in the home. We just refinanced our home at 30 years. We are in our early 40's, so we plan on retiring and selling this home long before it's paid off.
     
  4. Steve_Tk

    Steve_Tk Cinematographer

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    If you will pay more principle, here is a heads up. Just make sure if you want to write a 2nd check to pay off sooner that you be sure to write "TOWARDS PRINCIPLE ONLY!". Or else some of the vultures will just take that money towards your next payment, meaning you are just paying the next principle and interest early, which doesn't do anything for you. But writing towards principle only will pay off your house quicker and reduces your total interest you will pay.

    But unless you write that, they will not put it only towards principle.
     
  5. Patrick Sun

    Patrick Sun Moderator
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    On my monthly mortgage "bill" there is a field that allows me to specify how much extra I want to pay in principle, and I just send in one check with the extra amount in the final amount. Haven't had a problem yet with this way of paying additional principle each month.

    And in the printout for my previous month's payment, it details the amount that went to principle, interest, and escrow, and then also additional principle (IIRC), so I know that the extra amount I pay each month is going to paying down on the principle.
     
  6. Leila Dougan

    Leila Dougan Screenwriter

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    Patrick, do you know if the same can be said for car payments? I always pay extra each month but unfortunately I have not been specifying the extra should go to principle. The required payment lowers each month so I assumed it was, but now I'm afraid it hasn't.
     
  7. Patrick Sun

    Patrick Sun Moderator
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    For most car loans, you don't get a break for paying extra each month due to how the loan is structured (thus it's better to just pay the bare minimum to keep the repo man from showing up at your house). But it pays to read the fine print. YMMV.
     
  8. Leila Dougan

    Leila Dougan Screenwriter

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    Thanks Patrick, I'll take a look at the fine print again. We were just trying to get it paid off quicker since we can afford it and there's no penalty for doing that.
     
  9. Keith Mickunas

    Keith Mickunas Cinematographer

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    Every car loan I've ever had I paid off early and saved money. I don't know who you bank with Patrick, but I'd be looking for someone else if I was you.
     
  10. SteveA

    SteveA Supporting Actor

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    Many car loans use something called the "Rule of 78" for calculating interest, rather than the "declining balance" method. Under the "Rule of 78" (which is illegal in some states), the amount of interest accrued each month is fixed, rather than based on the outstanding balance at that time. Under a "Rule of 78" loan, there is no benefit to paying a little extra toward the principal each month because the loan continues to accrue the same amount of interest regardless. You only benefit by paying off the entire balance, at which time the interest payments just stop.
     
  11. AjayM

    AjayM Screenwriter

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    Almost every car loan will be a simple interest loan and you should be able to pay extra towards principle (only), call your lender and find out how to do it. As mentioned a lot of places will assume any extra money goes towards both interest and principle and not just principle alone.

    Andrew

    Edit: As Steve noted the 7/8 loan is another type of car loan. But I've never seen one given except at those "bad credit no problem" type dealers.
     
  12. Patrick Sun

    Patrick Sun Moderator
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    Yes, I was referring the the "Rule of 78" car loans in my example. Some loans have early pay-off penalties as well. So be careful and know what kind of loan you enter into with a lender.

    As for me, I paid cash for my last car, so car payments haven't shown up on my financial radar in quite some time for me. Then again, I drive a modest little car, but no monthly car payments makes my modest little car look better and better... [​IMG]
     
  13. MikeAlletto

    MikeAlletto Cinematographer

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    You all write checks for your mortgage? I get an email at the beginning of the month from wells fargo (who bought my mortgage) telling me my bill is ready. I login and schedule the payment detailing any extra into either escrow or principle and then don't worry about it. Get an email at the end of the month when it processes then repeat.

    I just wish I could put my mortgage on my amazon visa card. I would be able to rack up $25 off amazon discounts every 2 months [​IMG]

    As far as car loans go I don't know why anyone would sign for the loan if you couldn't pay it off sooner and save some money in doing so.
     
  14. Tony Whalen

    Tony Whalen Producer

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  15. Keith Mickunas

    Keith Mickunas Cinematographer

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    Tony, we got all the same stuff, it's just a matter of how you want to set it up. I just haven't gotten around to automating mine because some of those systems don't make it easy for you to vary your payment on a regular basis, and I'm waiting until next year when my escrow gets readjusted and I get some other things paid off. Then I'll automate it with an extra amount to my principle.

    I get paid montly, on the last business day, so I haven't even looked into the every other week option, but the weird thing is my credit union, who I don't have my mortgage with, wants to charge people an extra 0.25% for that. On everything else they're really good, but that one point their awful.

    Has anybody else heard of interest first loans? My friend is in the process of buying a house and found some banks are offering this. The loan officer at the credit union said they just started because people were calling wanting them. That just seems very odd. I don't see in what way those could be beneficial.
     
  16. Todd Hochard

    Todd Hochard Cinematographer

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  17. Eric_L

    Eric_L Screenwriter

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    The way I see it, my house payments are fixed for 30 years (ok, 29) at a very comfortabl level. In 20 years the payment will seem ridiculously low. (just as house payments from 20 years ago now see ridiculously low) due to inflation.

    It may sound good now to have my house paid off in 22 years, but in 22 years I will be laughing at my house payment.

    Meanwhile I am contributing generously to my fuure needs via 401k and taxable savings (I make too much for an IRA or Roth - boo!)
     
  18. Bryan X

    Bryan X Producer

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  19. MikeAlletto

    MikeAlletto Cinematographer

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  20. Keith Mickunas

    Keith Mickunas Cinematographer

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    That's what I'm getting at Bryan, what's the point? Is there some advantage? It doesn't seem reasonable to me. Perhaps there's a tax advantage for business purposes.
     

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