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Sat 11 Aug, 2012 02:22 pm
I have been paying off a loan used to buy my home since 1997. The loan is structured in such a way that at the beginning, most of the money which I pay goes to interest and little to principal. It is my understanding that this is not uncommon these days. I once heard someone refer to it as an amortization schedule. For the first 10 years of the loan, I stupidly just paid my mortgage and didn't thing about it too much, but for the past 5 years, I have been putting an extra amout to go towards principal into my monthly payment so that the remaining principal goes down a little faster. The whole setup seems kind of unfair, except that I agreed to it. I should maybe add that I bought my condominium because the apartment I was living in decided to become a condominium, so I had to buy it or get out. I had had vague thoughts over the years about buying property and when I learned that this was going to happen, I decided that that might be an appropriate time to do so. Once again, this was in 1997.
Here is my question, do all loans made for houses, cars, etc. have exactly the same schedule of paying off the interest before the principal, that is, are all loans from all lending institutions exactly as bad as each other in this respect? Is there any point shopping around for any future loans I might require in this regard, or are they all exactly equally bad in terms of paying off the interest before the principal? If I were shopping around for a loan, what question would I ask the potential future lender to inquire about this particular concern? I don't really know the words to form the question.
Thanks in advance for any light you can shed on this.
@Brandon9000,
Quote:Here is my question, do all loans made for houses, cars, etc. have exactly the same schedule of paying off the interest before the principal, that is, are all loans from all lending institutions exactly as bad as each other in this respect? Is there any point shopping around for any future loans I might require in this regard, or are they all exactly equally bad in terms of paying off the interest before the principal? If I were shopping around for a loan, what question would I ask the potential future lender to inquire about this particular concern? I don't really know the words to form the question.
Not all of them do. Depends on the contract you sign and that’s the questions I would be asking. Some will allow you to make your loan payment and apply another amount towards principle.
@jcboy,
jcboy wrote:
Quote:Here is my question, do all loans made for houses, cars, etc. have exactly the same schedule of paying off the interest before the principal, that is, are all loans from all lending institutions exactly as bad as each other in this respect? Is there any point shopping around for any future loans I might require in this regard, or are they all exactly equally bad in terms of paying off the interest before the principal? If I were shopping around for a loan, what question would I ask the potential future lender to inquire about this particular concern? I don't really know the words to form the question.
Not all of them do. Depends on the contract you sign and that’s the questions I would be asking. Some will allow you to make your loan payment and apply another amount towards principle.
Yes, my home loan does, but my question is about the relative fractions of my payment which go to interest and principal apart from any extra payments I might make.
@Brandon9000,
The basic principle is interest first and then principal.
As jcboy has pointed out you can get contracts that allow you to make additional payments toward the principal - but they are the exception (and usually have to be requested) rather than the rule.
Some nasty ones charge you a fee for making extra payments toward the principal
if you don't do it at the right time.
@ehBeth,
ehBeth wrote:
The basic principle is interest first and then principal.
As jcboy has pointed out you can get contracts that allow you to make additional payments toward the principal - but they are the exception (and usually have to be requested) rather than the rule.
Some nasty ones charge you a fee for making extra payments toward the principal
if you don't do it at the right time.
Thank you ehBeth, and please say "hi" to Setanta for me. However, I am already paying extra principal. My question was intended to discover whether all loans have equally bad schedules of interest vs. principal or whether some are better than others, when you only make the required minimum payment.
@Brandon9000,
To some extent, the difference between "interest" and "principle" is artificial. Money is fungible so there is no difference between a dollar of principle or a dollar of interest once they're mingled together. You can say you paid off all the principle first and now you are just paying off the accumulated interest and it would all come out the same. That said, it is the nature of a loan that you will pay less and less interest as your loan value drops and therefore the balance will drop faster towards the end of the loan. All loans you can get from a bank work this way so you didn't do anything foolish on your '97 loan and I'm not sure how you could structure a loan with regular payments to do anything otherwise. As for sending in extra money, that is the same as getting a loan with a shorter term. If you can commit to regularly making the extra payment, you will get a lower interest rate by taking a shorter term loan. It's easy to find banks that will make loans for 10,15,20 or 25 years instead of the standard 30 and I've heard of one online bank that allows you to pick the length of the loan so you can get the exact term you want. Finally, home loan interest is generally not a bad thing to pay. The interest rate is pretty low and may be tax deductible (depending on your situation). Unless you have money laying around and can't get a decent interest rate on it, there is usually no rush to pay down a mortgage. I just refinanced and took out money because I borrowed at <4% interest and can get ~7% on my investments.
@Brandon9000,
Brandon9000 wrote:My question was intended to discover whether all loans have equally bad schedules of interest vs. principal or whether some are better than others, when you only make the required minimum payment.
All fixed rate loans for the same amount, interest rate, and duration should have the same payment/amortization schedule.
The benefit of shopping around for loans is the ability to get a better interest rate, or lower loan origination costs. Not all lenders will offer the same terms.
Beware of adjustable-rate loans/mortgages. These are usually the ones that have penalties for paying off the loan early, because the whole point is to sucker people in with low initial payments and then jack up the interest rate after a few years.
@DrewDad,
DrewDad wrote:
Brandon9000 wrote:My question was intended to discover whether all loans have equally bad schedules of interest vs. principal or whether some are better than others, when you only make the required minimum payment.
All fixed rate loans for the same amount, interest rate, and duration should have the same payment/amortization schedule....
Thanks. I had hoped that that might vary a little.
Hi everyone,
The information posted here is very informative.I have recently joined this forum . Now I am here to learn and share my views with other people.
Hello friends,
More than 27 million veterans of the U.S. armed forces are eligible to take advantage of special VA financing to purchase or refinance their homes. Like other home loans, VA loans are made by private lenders like mortgage companies and banks. Agents at these private lending institutions are qualified to offer eligible veterans unique financing incentives that result in lower APRs.
Demystifying APR
APR stands for "annual percentage rate," and is designed to help buyers determine the true cost of borrowing money for a house. The APR formula was created by the government, and its calculations factor in the loan's interest rate and other costs like the origination fee, points, closing costs, mortgage insurance, etc. Because of the added figures the APR precentage is always higher than the interest rate quoted on a loan.
Thanks
Gregorys simp
@Gregoryssimp,
Gregoryssimp wrote:
Hello friends,
More than 27 million veterans of the U.S. armed forces are eligible to take advantage of special VA financing to purchase or refinance their homes. Like other home loans, VA loans are made by private lenders like mortgage companies and banks. Agents at these private lending institutions are qualified to offer eligible veterans unique financing incentives that result in lower APRs.
Demystifying APR
APR stands for "annual percentage rate," and is designed to help buyers determine the true cost of borrowing money for a house. The APR formula was created by the government, and its calculations factor in the loan's interest rate and other costs like the origination fee, points, closing costs, mortgage insurance, etc. Because of the added figures the APR precentage is always higher than the interest rate quoted on a loan.
Thanks
Gregorys simp
No one asked about APRs. I asked about the fact that the borrower seems to always pay off the interest first with minimal principal being paid until the end of the loan. I asked if it was possible to get a loan that was better in that respect.
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