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71

In other words, math. All the other answers are great, but I thought I might add something concrete to clarify slightly. Consider a counterexample. Suppose I borrow $120000 at 1%/month interest (I know mortgages are usually priced with annual rates, but this will make the math simpler). Further suppose that I want to pay a fixed amount of principal each ...


33

It's not correct. You pay both principal and interest on amortized loans. What happens is that you pay the interest accumulated on that principal during the period. As the time passes - some of the principal is paid off, allowing you to leave more for the principal because the interest becomes less. Thus the longer in the term - the quicker the growth of the ...


26

Excellent answers so far, so I will just add one additional consideration: liquidity. Money invested in a mutual fund (exclusive of retirement accounts with early withdrawal penalties) has a relatively high liquidity. Whereas excess equity in your home from paying down early has very low liquidity. To put it simply: If you get in a desperate situation (...


22

Naturally the advice from JoeTaxpayer and dsimcha is correct, every situation is different. I will get reckless, go nuts and make a recommendation! You are young, childless for the time being. Do the following with your money: Eliminate all credit card debt or other unsecured debt. Max any matching retirement accounts at work. Fully fund a Roth IRA at $...


20

Assume a month to month mortgage. This is a simplification, but it will illustrate the point. Borrow $100,000 at .5% a month. Make a payment of $1000 each month. So, for the first month, it will cost you $500 in interest to borrow the entire balance for one month. When you make your payment, $500 goes to interest, and 500 goes to principal. Your new ...


14

I was going to ask, "Do you feel lucky, punk?" but then it occurred to me that the film this quote came from, Dirty Harry, starring Clint Eastwood, is 43 years old. And yet, the question remains. The stock market, as measured by the S&P has returned 9.67% compounded over the last 100 years. But with a standard deviation just under 20%, there are years ...


11

Banks don't make you pay different amount of principal at different stages of the mortgage. It's a consequence of how much principal is left. The way it works is that you always pay off interest first, and then any excess goes to pay off the principal. However early in the mortgage there is more interest, and so less of the payments go toward principal. ...


10

Most mortgages (in the US) accrue interest on a monthly basis, and in that case it doesn't matter on what day(s) you make your payment. 4 times per month or once per month will be identical if the totals are equal. It's rare, but some mortgages accrue interest daily (like a credit card) and in that case it would help to make earlier payments if possible. ...


7

The breakdown between how much of your payment is going toward principal and interest is very important. The principal balance remaining on your loan is the payoff amount. Once the principal is paid off, your loan is finished. Each month, some of your payment goes to pay off the principal, and some goes to pay interest (profit for the bank). Using your ...


7

The typical case would be - as you expected - that the interest goes down equally dramatically, and you would pay much less interest. Note that that does not remove your obligation to pay the full 1000 every month - even though you could argue that you are 90 months ahead in paying, you still need to deliver 1000 a month, until it is fully paid. Some ...


6

The payments might be on time, but the aren't made the same numbers of days apart: $142.77 in interest from February 3rd to March 2nd is 28 days @ 5.0899 per day $154.97 in interest from January 4th to February 3rd is 30 days @5.166 per day The percentage of the daily payment for interest is decreasing, but the numbers of days wasn't constant.


6

I wouldn't pay down your mortgage faster until you have a huge emergency fund. Like two years' worth of expenses. Once you put extra money toward principal you can't get it out unless you get a HELOC, which costs money. You're in a position now to build that up in a hurry. I suggest you do so. Your mortgage is excellent. In the land of inflation it ...


6

In your title you ask what happens typically. In the body of the question you ask if you have to specify how the extra payment will be treated. The answer is you have to ask your lender about your loan. My loan is through my credit union. I can make an extra payment anytime I want. The form on the website allows me to specify if the payment is to be ...


5

I calculated 14098.64 and 14098.74. Here are the methods. First, what I would say is more mathematically correct. For a loan with equal payment periods we have the standard formula below. pv = present value of principal c = periodic repayment amount r = periodic interest rate n = number of periods With an extended first period the formula is changed ...


5

Outside of any payment plan that might be set up, credit cards don't amortize - they charge interest on the unpaid balance at the end of the month, without regard for previous months, and then add that to the balance. Any amount you pay the credit card company is applied to that balance -- there's no differentiation between principal and interest, because ...


5

Credit cards don’t have fixed monthly payments like a mortgage or other traditional loan. As a result, there isn’t really a distinction between “principal-only” payments vs. future pre-payment as there is with a mortgage. When your credit card statement is generated, the bank adds any finance charges for the month to your balance. This finance charge is ...


4

Banks make you pay accrued interest on the current outstanding balance of the loan each month. They want their cost of capital; that's why they gave you the loan in the first place. On top of this, you will want to pay some additional money to reduce the principal, otherwise you're paying interest forever (this is basically what large companies do by issuing ...


4

The answer to question 1 is yes, you can always reduce your loan when you remortgage by introducing additional funds. There is some possibility a (relatively) small charge might be applicable for managing the marginally more complex transfer, but it shouldn't be too much.. The answer to question 2 is NONE of your over payment amounts would have gone on ...


4

Paying off the debt is low-risk, low-reward. You're effectively guaranteed a 4% return. If you buy a mutual fund, you're going to have to take some risk to have a decent chance of getting better than 4% and change return in the long run, which probably means a fund that invests primarily in stocks. Buying a stock mutual fund is high-risk, high reward, ...


4

It depends on the loan contract if this is even possible, and also if it is the default. Banks of course prefer to use those extra payments against ‘future payments’, meaning you are giving them interest-free money upfront, to apply against your next requirement payment. That is of course very bad for you, as you do not only save no interst, but also lose ...


4

Mortgage rules differ by country, and within a country they further differ by the lender. Assuming this is in the US, and based on my limited experience (2 mortgages), you can only add extra payment on top of a regular payment. For example, if your regular payment is $1000, and you want to pay $500 extra, you make $1500 payment. Regular portion of the ...


3

Other answers are already very good, but I'd like to add one step before taking the advice of the other answers... If you still can, switch to a 15 year mortgage, and figure out what percentage of your take-home pay the new payment is. This is the position taken by Dave Ramsey*, and I believe this will give you a better base from which to launch your ...


3

The mathematically correct answer is to invest, because you'll get a higher rate of return. I think that answer is bunk -- owning your home free and clear is a huge burden lifted off of your shoulders. You're at an age where you may find a new job, business, personal or other opportunities will be easier to take advantage of without that burden.


3

It's important because it shows that the amount you owe does not decrease linearly with each payment, and you gain equity as a correspondingly slower rate at the beginning of the loan and faster at the end. This has to be figured in when considering refinancing, or when you sell the place and pay off the mortgage. It also shows why making extra payments ...


3

For the first month, it is for additional interest of Feb. For 19 days divided by 365 we get int of 791.23. Add this to Principal of 160,000. On this principal multiply by rate and divide by 12. The Interest from second month onwards is 30/360. i.e outstanding balance Multiplied by Rate divided by 12. It is difficult to directly find the EMI in such cases....


3

Ask the mortgage company. Some people do this. If you do this you will be making 13 monthly payments a year. If they credit is correctly that will shorten the length of the mortgage and save you interest. What you want to avoid is having to pay a fee for this. In the past some companies would charge a setup fee to allow you to make mortgage payments ...


3

For most regular mortgages, pay a week or two early or pay up to the day before a late fee, and there is no difference in accrued interest. Most banks will not accept partial payments, but will put them aside until a full payment is pending. That said, I’d put aside whatever money you wish, and send it once a month with the regular payment. If you ...


3

As others have noted, mortgage interest usually accrues monthly, so this would make no difference at all. Even if the interest accrues daily or weekly, it would make only a modest difference. If your mortgage is 5%, I estimate this would save you $6 per month in interest. (Depending on exact dates of deposit, etc.) If you're driving to the bank, you could ...


2

It depends on the type of loan. Fully amortized loans have a schedule of payments don't recalculate as you pay. If you want to make an additional payment you need to contact the lender to apply your payment toward principle and reamortize the loan. Otherwise all your additional payment will do is change the amount due on your next payment, or push out ...


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