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Author: foobarista Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127677  
Subject: Specific questions on paying down mortgage Date: 4/29/2002 3:52 AM
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I have a few detailed questions about paying off a mortgage:

As far as I can tell, when you get a mortgage, you get a schedule
detailing, month by month, how much of your standard payment goes
to principal and how much goes to interest. This schedule is
front-loaded so the first payment is all to interest and the last
payment is all to principal. So, while mortgages are quoted as having
a particular interest rate, what you actually commit to is to pay
X dollars per month over Y months, where X*Y equals to
(mortgage amount) * compounded interest over the term of the loan.
(Assume a fixed-rate mortgage)

So, unlike a credit card, where you have interest computed on a running
balance, with a mortgage you have committed to pay a certain
principal and a certain amount of interest if you pay to term.

Question 1: Is the above true, or am I full of it :)

Question 2: If the above is true, if you prepay a mortgage BUT intend
to sell the property before you could pay it off anyway, you are going
to save zero actual interest (and have realized a zero actual return
on your money), since the interest paid off is according to the payment
schedule. The question is: is this true?

I sometimes see TMF posters saying that paying down a mortgage early
is like an interest rate boost equal to the rate of the mortgage.
If Question 2's answer is Yes, then they are wrong unless you
completely pay off the mortgage. Also, the "older" your mortgage, the
less interest you will save by paying down since the principal/interest
payoff schedule is front-loaded. (I guess the key question here is
does incremental payments to principal affect the interest side of the
payment schedule, or is the interest side graven in stone until the
principal reaches zero?

Take an extreme example. Suppose you have a $100K mortgage at such
an (awful) interest rate that you are paying $1000/month, with a table
described above. You make a payment of $100,999 in the first month,
reducing principal to $1 in the second month. In the second month,
do you owe (about) $1001 to pay off, or do you owe $1 + a few cents?

Question 3: Why do mortgage providers actually want you to pay down
early? If Question 1 is true, it makes sense - they get basically
free money and cash flow from what I suspect is the vast majority of
their mortgages, which are paid off when houses are sold - while
still getting all of the interest.

Thanks.
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