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Old 01-15-2015, 09:17 AM
 
Location: Chicago
3,018 posts, read 5,095,142 times
Reputation: 3463

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Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?
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Old 01-15-2015, 09:20 AM
 
12,404 posts, read 9,212,610 times
Reputation: 8868
Quote:
Originally Posted by ChiGuy2.5 View Post
Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?
1. Not towards pure interest, but towards future scheduled payments. If you pay toward principal only, then you have to make the full payment next month. OTOH, paying future scheduled payments gives you the flexibility to "skip" a payment if needed without incurring late fees or a credit hit.

2. Interest is charged on the outstanding principal balance. Any money not applied to principal thus does not reduce the cost of interest.

3. Yes, provided you have at least 6 months of bills held in an emergency account.
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Old 01-15-2015, 09:22 AM
 
Location: The Triad (NC)
26,875 posts, read 57,944,657 times
Reputation: 29305
Quote:
Originally Posted by ChiGuy2.5 View Post
I am currently applying my extra money towards the Principal amount
1) Why would anybody pay extra towards interest?
When I saw the thread title I was worried that someone didn't get it.


Quote:
3) Given my goal of trying to avoid paying for PMI
is allocating my extra money towards principal a good idea?
Only other way is waiting for market values to rise enough to up the equity.
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Old 01-15-2015, 09:26 AM
 
2,303 posts, read 2,125,226 times
Reputation: 3827
Quote:
Originally Posted by ChiGuy2.5 View Post
Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?
The only time I can ever think that paying extra towards interest makes sense is if you're not going to be around to send a check. Let's say you were going out of the country for 2 months. You could prepay your mortgage essentially. With the common use of auto draft, i'm not sure why anyone wouldn't just use auto pay, but some people still like to write the check each month. (Note: I'm assuming that would work, in reality I've never paid extra towards interest, nor would I ever, this is just about the only stretch scenario I can come up with. In practice, I think it's more of a "gotcha" tactic by the banks)

But for you, you're definitely looking to pay towards principal, because the situation is exactly as you described it. The principal that still exists continues to generate interest.

For PMI, you need to get your outstanding balance below 80% of your property value, so yes, principal is what you're trying to pay down.
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Old 01-15-2015, 09:31 AM
 
3,277 posts, read 2,343,543 times
Reputation: 5653
Quote:
Originally Posted by ncole1 View Post
1. Not towards pure interest, but towards future scheduled payments. If you pay toward principal only, then you have to make the full payment next month. OTOH, paying future scheduled payments gives you the flexibility to "skip" a payment if needed without incurring late fees or a credit hit.
I have never seen this on mortgages, have you? I've seen it on student loans.
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Old 01-15-2015, 09:33 AM
 
12,404 posts, read 9,212,610 times
Reputation: 8868
Quote:
Originally Posted by KaraG View Post
I have never seen this on mortgages, have you? I've seen it on student loans.
My father's first two mortgages were like that.
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Old 01-15-2015, 09:39 AM
 
Location: New York
1,096 posts, read 898,863 times
Reputation: 1066
Quote:
Originally Posted by KaraG View Post
I have never seen this on mortgages, have you? I've seen it on student loans.
Yeah when I was paying off my student loans they were screwing up and paying future payments. it wasnt that much so I didnt bother trying to get them to fix it.

On my mortgage I don't see that option.
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Old 01-15-2015, 09:44 AM
 
2,303 posts, read 2,125,226 times
Reputation: 3827
Quote:
Originally Posted by jms493 View Post
Yeah when I was paying off my student loans they were screwing up and paying future payments. it wasnt that much so I didnt bother trying to get them to fix it.

On my mortgage I don't see that option.
It depends on the company. My mortgage with US bank has that option.
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Old 01-15-2015, 10:02 AM
 
Location: Boise, ID
8,011 posts, read 22,532,873 times
Reputation: 9213
My current mortgage is like that too. If I make extra payments, it pushes out my next due date. But then, it is also a non-amortized loan. Every month, the amount that goes to principal and the amount that goes to interest remain constant.
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Old 01-15-2015, 10:10 AM
 
7,391 posts, read 4,439,629 times
Reputation: 8340
Quote:
Originally Posted by Jeo123 View Post
It depends on the company. My mortgage with US bank has that option.
My mortgage is with Wells Fargo. I have the option to apply towards future payments too.
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