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Old 01-08-2017, 01:01 PM   #1
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Mortgage question. First home


have some questions about mortgage payments...I'm not really sure how they work so would like some advice from others with experience. Bought our first house this summer for 349,900. Interest is 3.5%, 30 year VA loan (no money down). Payments are 1750/month. I pay an additional 250/month towards principal to make it an even 2,000.
Under payment summary...
-565/month towards principal (not including the extra 250 I put)
-1,000/month interest
-180/month escrow

Under year to date summary...
12.5k for total received
4.7k principal
6k interest
1.6k escrow

So even with making extra payments I am paying more in interest then what is actually going towards principal. I realize there will be a lot of interest on a 350k loan, but had no idea I'd be paying more in interest than the actual value of the house. Does this seem normal for this situation or am I missing something? I was underneath the impression that 3.5% was a good rate, and that putting that additional money towards principal every month would greatly reduce my overall payment amount but it doesn't seem like that's the case.
Thanks!

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Old 01-08-2017, 01:13 PM   #2
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Re: Mortgage question. First home


wow..a 350 mortgage with no money down for a first time Buyer. Simply wouldn't happen in Canada.
But keep plugging away any extra payments you are allowed to make...and maybe with time in your home value will increase. Sell and put the proceeds down on the next home. ANd so on and so on. Eventually the bank will no longer own on your behalf

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Old 01-08-2017, 01:53 PM   #3
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Re: Mortgage question. First home


This is what is referred to as amortization. A shorter term loan would have netted you a slightly higher payment, but with more of it going to principle.
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Old 01-08-2017, 02:36 PM   #4
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Re: Mortgage question. First home


Here is what your amortization chart would like like, without the extra payments:

http://www.bankrate.com/calculators/...ortization_btn

Amortization with extra payment:

http://www.bankrate.com/calculators/...alculator.aspx
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Last edited by ZTMAN; 01-08-2017 at 02:43 PM.
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Old 01-08-2017, 03:15 PM   #5
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Re: Mortgage question. First home


I have a similar Excel spreadsheet at home. Using it on the loan without extra payments, I show payment number 123 as the break even payment, within a couple of cents. (Corresponds to April 2027 on the 1st link by ZTMan)

So for the first 10 years and 2 months, the interest amount exceeds the principle amount. So the homeowner making the payments per schedule can't expect to see principle paid exceed interest on the annual statement until year 11.

Your extra payments can move that forward several years.
It will also knock about 6 years of payments off the back end of the loan.
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Old 01-08-2017, 03:26 PM   #6
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Re: Mortgage question. First home


If all of the numbers are correct, this is called a negative amortization loan.

https://www.mtgprofessor.com/A%20-%2...ation_work.htm

The usual purpose is to allow the borrower to qualify for a larger mortgage than otherwise would be possible.

Negative amortization loans were popular in the 1980s, but so many people got burned, they were shunned.

When you signed all the mortgage papers, there should have been all kinds of red caution flags all over the place warning the borrower that the payments do no cover all the interest, that no principal is being paid off and the balance of the loan will increase.
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Old 01-08-2017, 03:51 PM   #7
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Re: Mortgage question. First home


Not knowing much about mortgages I need ask what is the escrow dollars?
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Old 01-08-2017, 03:55 PM   #8
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Re: Mortgage question. First home


Quote:
Originally Posted by joed View Post
Not knowing much about mortgages I need ask what is the escrow dollars?
Usually the payments into escrow go to cover property taxes and homeowners insurance, and possibly other taxes/fees such as water and sewer district assessments.
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Old 01-08-2017, 04:25 PM   #9
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Re: Mortgage question. First home


Quote:
Originally Posted by ZZZZZ View Post
Usually the payments into escrow go to cover property taxes and homeowners insurance, and possibly other taxes/fees such as water and sewer district assessments..
Thanks for that explanation. It's not a common term up here. The only thing that our banks will allow to be lumped into mortgage payments is property taxes (including and water fees, etc.), and then it simply appears as a line item. Insurance is a separate responsibility of the owner.

To the OP, others have previously explained that the interest component is front-loaded into the amortization schedule. It's unfortunate that the lender or your lawyer didn't explain that to you. One thing you might want to ensure is that your extra payments are going directly to principle rather than just being applied as extra mortgage payments. It would still move you along the schedule faster, just not reduce the principle as fast.
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Old 01-08-2017, 06:16 PM   #10
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Re: Mortgage question. First home


Quote:
Originally Posted by joed View Post
Not knowing much about mortgages I need ask what is the escrow dollars?
Here in Canada it's called PIT payments (Principle, Interest, Taxes). Banks here don't take care of your water, insurance... etc. That's up to you, but you MUST carry home owners insurance as part of the mortgage contract.

Last edited by Bob Sanders; 01-08-2017 at 06:19 PM.
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Old 01-08-2017, 06:26 PM   #11
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Re: Mortgage question. First home


Down here it can be PITI, as the insurance might be included. Personally, I have nothing escrowed but my brother has both his taxes and his insurance escrowed.
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Old 01-08-2017, 07:19 PM   #12
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Re: Mortgage question. First home


I think everywhere they should be called P-I-T-A (pain in the ...) but it's what ya gotta do if you want to own. I remember in the early 80s when rates peaked at around 18% or 20% up here I had a fixed one (my first house) at around 9% IRRC and felt absolutely blessed.
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Old 01-08-2017, 07:30 PM   #13
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Re: Mortgage question. First home


Study ZTMAN's amortization schedule.... while mathmatically it is complicated to calculate, it will make sense if you understand:

With a set payment each month.... you are paying interest (at the rate of 3.5% annually) on the outstanding debt, with part of that payment going to pay down your debt (principle).

Thus, the next month, you will not have as much debt and your interest charge will be less, your payment stays the same, so more of it goes to principal (paying down your debt).... and on and on each month.

Your last payment will go almost all to principal, and just a little to interest.

Your extra 250/per month is a prepayment. Your actual mortgage will have a section that defines how/when that prepayment will be applied to your loan (debt).

But you are smart in makeing that prepayment. In the long run, you will retire (pay off) your loan much quicker, and end up paying a whole lot less interest.

Good going
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Old 01-13-2017, 04:58 PM   #14
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Re: Mortgage question. First home


basically the same with ANY loan over a term, car loan? you will end up paying more than the car value when you're done and said... the good thing with a home loan, is the value of the property will more than likely increase over time... still not yielding what you paid in interest, but at any rate, youd still be paying around the same if you rented, making someone else the money...
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