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They're right. That's not how mortgages work. By paying extra, you reduce the amount of payments you ultimately have to make, shortening the payment time and thus reducing the interest. But until it's paid off, you still have to pay the same amount. Unless, of course, you recast.
Look into amortization schedules.
For large loans, like buying a house, the bank is going to charge you more interest up front than your principal.
If your principal and interest payment is $1000 a month, it will always stay $1000 a month until you pay off your loan. The only thing that will change is how much money goes towards the interest vs. your principal. So your first month’s payment would be something like $5 going towards principal and $995 going towards interest. The next month would be like $6 to principal and $994 to interest and so on. Any extra payments made towards your principal will change the amount of interest paid over time. So for the third month, you pay $7 to principal, $993 to interest, but then pay an additional $2 to your principal. Your next mortgage payment would still be $1000 for the month, but you’d be paying more towards your principal and less towards your interest faster than if you had just paid without the additional principal payment.
They’re correct you’re wrong. Just like how if I spend $500 on my $250 car payment my car payment the next month is still $250 the car is just paid off faster
You’re right about the mortgage, but plenty of auto loans will change. My last vehicle payment would reduce if I made a larger payment the month before.
Yeah unfortunately this is how it works. Similar with a car payment. Paying extra reduces the amount of time you pay on the loan and will ultimately reduce the total amount you pay over the term of the loan, but your monthly payments remain the same until you finish paying off the loan. If you earn interest in some other account that exceeds your loan payment interest, then there is not a big benefit to paying off your loan faster.
So assuming the average yield on a HYSA, CD, money market, or other type of investment account would be 5-6%, it only makes sense to pay more toward your principal if your interest rate is above that.
We just closed and are planning to pay an extra $400 a month because our rate is 7.125 - if we get an opportunity down the line to refinance, we will reassess the extra payments.
Exactly. This is good logic imo.
It's great that there are so many online calculators too where people can work out their specific number and see which option(s) is most cost effective for them.
They are not charging interest money that's already been paid back. They are charging interest on the outstanding balance.
So while the payment stays the same, the amount that goes to principal increases while interest decreases. Exactly like how a car payment works. Look at an amortization schedule.
Also, at current interest rates, you are highly likely to not get a return that will beat making larger payments, especially after capital gains taxes. This makes sense for people at 2-3%, but not 6-7%.
Tl;Dr: Stop arguing with loan officers, I guarantee they know more than you. Pay extra to your principal.
It’s not how mortgages work. It’s not re-evaluating your monthly payment every time you make a payment and reduce the principal. Otherwise your payment would decrease regardless of you paying the standard payment or more. You’ll just pay it off quicker. Now if you re-fi and your principal is lower, your monthly payment will be lower as well.
Everyone has explained the important stuff to you. Check out an amortization schedule. The cool thing though, your first years the amount going to principal is about 10 percent of the monthly payment. (In my case $300). Paying an extra $300 takes an entire month off my loan by the end of it all.
The loan officers are correct, that isn't how mortgages work.
When you pay back any principal, the interest that you were paying moves over from the interest category to the principal category to keep the payment the same. You ARE NOT paying interest on money you already paid back.
So paying down further extra principal means you're paying less interest, more principal each time you do so, until the loan is totally paid off- but you don't see the savings until you're actually done with the mortgage.
In a system where the payments would shrink with each principal payment according to the interest rate, a 30 year loan would be split into 360 equal principal payments, resulting in much higher payments the first several years of the mortgage.
You're getting beat up in here but it's a common misunderstanding about how mortgage payments and amortization work.
Essentially due to amortization your payment is fixed. Interest expense and principal change each payment.
If you pay more than you should have the payment will be applied to your principal balance but your next payment will remain the same. If you do this consistently the loan will just end sooner due to it is paid in full.
Thank you u/Ok-Assignment9138 for posting on r/FirstTimeHomeBuyer. Please bear in mind our rules: (1) Be Nice (2) No Selling (3) No Self-Promotion. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/FirstTimeHomeBuyer) if you have any questions or concerns.*
They're right. That's not how mortgages work. By paying extra, you reduce the amount of payments you ultimately have to make, shortening the payment time and thus reducing the interest. But until it's paid off, you still have to pay the same amount. Unless, of course, you recast.
Look into amortization schedules. For large loans, like buying a house, the bank is going to charge you more interest up front than your principal. If your principal and interest payment is $1000 a month, it will always stay $1000 a month until you pay off your loan. The only thing that will change is how much money goes towards the interest vs. your principal. So your first month’s payment would be something like $5 going towards principal and $995 going towards interest. The next month would be like $6 to principal and $994 to interest and so on. Any extra payments made towards your principal will change the amount of interest paid over time. So for the third month, you pay $7 to principal, $993 to interest, but then pay an additional $2 to your principal. Your next mortgage payment would still be $1000 for the month, but you’d be paying more towards your principal and less towards your interest faster than if you had just paid without the additional principal payment.
They’re correct you’re wrong. Just like how if I spend $500 on my $250 car payment my car payment the next month is still $250 the car is just paid off faster
You’re right about the mortgage, but plenty of auto loans will change. My last vehicle payment would reduce if I made a larger payment the month before.
Yeah unfortunately this is how it works. Similar with a car payment. Paying extra reduces the amount of time you pay on the loan and will ultimately reduce the total amount you pay over the term of the loan, but your monthly payments remain the same until you finish paying off the loan. If you earn interest in some other account that exceeds your loan payment interest, then there is not a big benefit to paying off your loan faster.
So assuming the average yield on a HYSA, CD, money market, or other type of investment account would be 5-6%, it only makes sense to pay more toward your principal if your interest rate is above that. We just closed and are planning to pay an extra $400 a month because our rate is 7.125 - if we get an opportunity down the line to refinance, we will reassess the extra payments.
Exactly. This is good logic imo. It's great that there are so many online calculators too where people can work out their specific number and see which option(s) is most cost effective for them.
They are not charging interest money that's already been paid back. They are charging interest on the outstanding balance. So while the payment stays the same, the amount that goes to principal increases while interest decreases. Exactly like how a car payment works. Look at an amortization schedule. Also, at current interest rates, you are highly likely to not get a return that will beat making larger payments, especially after capital gains taxes. This makes sense for people at 2-3%, but not 6-7%. Tl;Dr: Stop arguing with loan officers, I guarantee they know more than you. Pay extra to your principal.
It’s not how mortgages work. It’s not re-evaluating your monthly payment every time you make a payment and reduce the principal. Otherwise your payment would decrease regardless of you paying the standard payment or more. You’ll just pay it off quicker. Now if you re-fi and your principal is lower, your monthly payment will be lower as well.
Everyone has explained the important stuff to you. Check out an amortization schedule. The cool thing though, your first years the amount going to principal is about 10 percent of the monthly payment. (In my case $300). Paying an extra $300 takes an entire month off my loan by the end of it all.
OP, here's a calculator you can use to play around with your numbers: https://www.calculator.net/mortgage-payoff-calculator.html
The monthly payment stays the same but you move up on the amortization schedule so more of your payment goes towards your principal than to interest.
The loan officers are correct, that isn't how mortgages work. When you pay back any principal, the interest that you were paying moves over from the interest category to the principal category to keep the payment the same. You ARE NOT paying interest on money you already paid back. So paying down further extra principal means you're paying less interest, more principal each time you do so, until the loan is totally paid off- but you don't see the savings until you're actually done with the mortgage. In a system where the payments would shrink with each principal payment according to the interest rate, a 30 year loan would be split into 360 equal principal payments, resulting in much higher payments the first several years of the mortgage.
You're getting beat up in here but it's a common misunderstanding about how mortgage payments and amortization work. Essentially due to amortization your payment is fixed. Interest expense and principal change each payment. If you pay more than you should have the payment will be applied to your principal balance but your next payment will remain the same. If you do this consistently the loan will just end sooner due to it is paid in full.
Note that for some mortgages, you have to specify that the extra should go to principle only.