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Originally Posted by notaproblem39
Thanks. So basically the longer I own the house and the longer I continue to make payments, if I do sell in the future I can expect a larger return because I’ll owe less to the bank.
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Yup! And hopefully the house will appreciate in value, although that doesn't always happen.
House prices do go up and down in a cyclical manner so when you're thinking of selling and if you have time, watch the house sales in your area and notice if they are high or low at the time. Obviously, you want to buy when the prices are low and sell when they are high.
Real estate is frequently used as a way to generate wealth, which is why numbers people get all excited about it.
When making loan repayments, such as to a credit card company, they will add interest to what you owe and then ask for a minimum payment, although unless you pay more than that, you'll be paying them forever. That's an example of a simple type of loan.
A mortgage usually isn't a straight loan where you pay the principal and interest back each month in the same amount. Generally, if you got your mortgage from a bank or traditional lending institution, it will be 'amortized'. It's a sneaky bank thing. 'Amortized' means at the beginning of the loan, more of your monthly payment goes towards the interest and less goes towards the principal. That keeps the amount you owe higher longer so the banks make more interest. Frequently, folks will sell a house before it's paid for so the banks want to get the interest quickly. With an amortized loan, the bank has collected more interest if the house is sold before it's paid for than if it were a non-amortized loan (same ratio of interest to principal each month).
Early on in the loan period, if you have any extra little bit of money to put towards the principal of the loan each month - and be sure to specify in writing that it is to be applied against the principal in the loan and not the interest, otherwise they will just apply it towards the next month's interest which doesn't help you as much at all - anyway, if you have a little extra now to apply towards the principal, it will really reduce what you owe on the house a lot faster. Or, if you get a windfall of some sort, apply that to the principal of your mortgage to decrease the number of payments you'll have to make.
Another strategy is to get a thirty year mortgage (which has lower levels of interest at the beginning payments than a fifteen year note), but make payments as if it was a fifteen year mortgage and apply the additional payment amount each month towards the principal. I forget the exact numbers, but that can pay off a thirty year mortgage in something like ten or twelve years. Of course, you're paying a much higher monthly amount, but it's for a much shorter amount of time. And overall, you'll end up paying a significant amount less for the house. If you ask the numbers folks, they'd probably figure it out for you. I have a banker fishing buddy and this is what he was explaining to me one day when the fishing was slow.
He was also telling me that paying the mortgage in two monthly payments instead of one reduced the amount paid at the end of the loan by quite a bit, too, but I forget the details on that. If the payment is due on the 1st, he recommended paying half of it two weeks early and then paying the remainder on the first or when ever the due date is.
He also recommended having a paycheck deposited into a savings account and then having about 80% of it ported over (the bank automatically does this) to the checking account or whatever account is used to pay bills. We had been paying bills and hoping to put the remainder into savings but it never seemed to get there. By putting it into savings first, somehow we managed to pay the bills on what was in the checking account and the savings started piling up. Later on it was enough for a down payment on some property, it was amazing.
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