20 Year Mortgage Question

[jeffmem]

I have a question about Mortgages.

Keep in mind where I live banks have different polices about payment.

Regardless of the interest rate now, does it make better sense to pay your mortgage payments monthly or paying interest only for a year and then at the end of the year paying a lump sum of cash? Where I live a lot of people do this, they claim it can save them a lot of money because the are not paying the mortgage back every month, but rather just pay interest for the first year and then at the end of that year pay a lump some.

[noppenbd]

I don't see how this could save you money unless you could somehow invest the money that would have gone towards principal and earn a higher rate than your mortgage.

[jeffmem]

Well that's pretty much what I am thinking too, why so many people do this I am not quite understanding. The bank gives you an option, the first two years you can choose to pay interest only and then afterwords start paying back the interest plus principal. But most investments won't be as high as the interest rate unless you get lucky some how.

[disneysteve]

Originally Posted by noppenbd

I don't see how this could save you money unless you could somehow invest the money that would have gone towards principal and earn a higher rate than your mortgage.

Actually, even that wouldn't help. Interest is based on the outstanding balance. If you aren't paying any principal each month, the balance remains the same. That means you are actually paying more interest than if you paid off a little principal each month.

[swanson719]

It's pretty stupid to not pay off the principal as fast as humanly possible. If you owe $130,000 on your mortgage, you pay 5% of $130,000 each year, or $6,500. That's why the first years of a mortgage are so interest heavy.

[jIM_Ohio]

Costs you more if you pay lump sum at end of year. Saves you money if you pay lump sum at beginning of year.

[m3racer]

Interest only loans are a dumb idea.

[jeffmem]

Nevermind, I realized it wasn't about this. But actually the fact that all the interest is tax deductible. So I heard something wrong.