Paying Extra Principal on Mortgage

[Anonymous]

I'm pretty sure this is a no-brainer, but want to make sure I'm not missing a nuance I should be thinking of. I own two properties - one is my primary residence with a low interest rate loan (2.875%) - the other is a second home with a higher interest rate loan (4.5%). I have about $1000 per month to put towards extra principal and assume it makes the most sense to put all of that down on the loan with the higher interest rate, right? And just pay the regular mortgage on the lower rate loan?

[Anonymous]

Correct, but I would not pay off either mortgage. Invest that $1000/month instead. Did you already buy your iBonds for this year?

[Anonymous]

Yes, pay the extra towards the higher rate.

[Anonymous]

Anonymous wrote:Yes, pay the extra towards the higher rate.

+1

[Anonymous]

Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

[Anonymous]

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

This makes no sense. effective interest rates don’t depend on the amount borrowed.

[Anonymous]

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

This is not true unless you have a terrible mortgage. Most let you apply extra to principal. The interest is not "front-loaded," rather interest is charged on the remaining mortgage balance so the interest paid dwindles over time. But the rate is the same.

All that said, OP I agree with PP who said prepaying a 4.5% mortgage should be well down your list of priorities with that extra $1k. I-bonds are paying almost 10% right now.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

This makes no sense. effective interest rates don’t depend on the amount borrowed.

+1 When I pay extra on my mortgage in January it reduces the principle which accrues interest in February. Thus, more of February's payment goes towards principle and less towards interest.

[Anonymous]

pp here. It is front loaded on a standard 30 year mortgage. Google "amortization schedule" and see for yourselves.

The first payment will be 90% interest, the last maybe 2%.

[Anonymous]

Anonymous wrote:pp here. It is front loaded on a standard 30 year mortgage. Google "amortization schedule" and see for yourselves.

The first payment will be 90% interest, the last maybe 2%.

I know what an amortization schedule is. You don't know how to read one. You pay more in interest the first month than the last because your balance is much higher in the beginning. You're paying the exact same interest rate on every payment. You cannot "effectively drive[] up" your interest rate by prepaying.

[Anonymous]

There is a difference between making a payment early and paying extra principal. Making my December payment in September does NOTHING to reduce the interest I owe, it just gives the bank my payment early. Making an extra principal payment reduces the loan balance, so reduces the amount of principal accruing on your loan. OP is talking about the later. The PP talking about effective mortgage rates may be confusing these two.

[Anonymous]

Anonymous wrote:pp here. It is front loaded on a standard 30 year mortgage. Google "amortization schedule" and see for yourselves.

The first payment will be 90% interest, the last maybe 2%.

Whoa! I guess you never took a finance class.

[Anonymous]

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

Congratulations, you’re the dumbest person on this board.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

Congratulations, you’re the dumbest person on this board.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Mortgage interest is front loaded. When you pre-pay, they put the payment towards the last payment in the amortization schedule, which includes very little interest.

You'll pay it off earlier, but Pre paying a mortgage effectively drives up the interest rate you are paying.

Congratulations, you’re the dumbest person on this board.

+INFINITY