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Originally Posted by DebbieL
The part about the interest only mortgage was added in a later post.
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Interest rate on mortage is 6.5%. It is an interest only loan but at a fixed rate (no balloon, arm, etc). I know how most feel about this--at the time we bought our home, I was a SAHM and we purchased it knowing our income would increase but it gave us a little more buying power at the time). Therefore, it is important to us to pay on the principal each month. We did put a nice downpayment on it so we DO have equity in our home between that the $200 over. By the way, we have always done the $200 over (even when I was SAHM).
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I bet OP could refinance. lower payment, and get a 15 year or 30 year fixed mortgage. I would look into this.
I would keep paying $200 towards principal. I would consider taking raises and adding it to this amount. Part of this would be a calculation as to what it would take to make a 15 year payoff on the interest only loan (calculate ammortization table for 15 yr fixed mortgage). More than likely $200/month does not cover the 15 year payoff, so I would increase payment until you reached that point. For example add car payment to this in 3 years and see what $500/month does to ammortization schedule. Add a 1% raise to this each year and see what that does. I would not keep the interest only loan for a long period of time, but while you have it, you have a risk, and the way to hedge that risk is to pay it down quickly.
Does this interest only payment balloon? I use 15 years above because that should protect you from a possible balloon payment in year 20, 25 or 30. If you have a 15 year balloon payment, you might need a different strategy if you cannot refinance.