Quote:
Originally Posted by jorian
Caveat: I am a mortgage broker working in Vancouver, BC
With all due respect to those posting here:
The Wells Fargo guy is full of it. The moment your payment lands in their account, it starts to accrue interest. The mortgage documents must disclose the terms of the contract and should include a section on priveleges (making extra payments - early payout etc). Maybe you aren't allowed to make extraordinary payments. Maybe the mortgage is securitized (sold after funding)
Most mortgage payments are calculated semi-annually and not in advance. This means it compounds twice per year and is due at the end of the month rather than the beginning.
Also if you choose a 15 year amortization, you are locked into paying that higher amount. Not a good thing if you suffer a financial setback. Set up the mortgage on a 25 year amortization but schedule your payment size to mimick that of a 15 year amortization. If, at some future date, you need a lower payment you can fall back to the contracted minimum payment. With many institutions this also creates a possible "payment holiday" where any payment over the contractual minimum counts towards future payments. KInd of nice if you want to skip a payment around the Christmas holidays or if things tighten financially for you.
|
This is good advice, although I'd disagree with the "15 year or 20 year only" part. That only works in situations where people are buying in a "normal" market (which most of the U.S. is not in), people are fabulously wealthy and have huge amounts to put down and earn exceptionally high amounts relative to the price of the property or they're buying a very small place such as a vacation home outside their area.
The reality is most people HAVE to go 30+ years now JUST to barely afford the extremely overpriced costs. When things stabilize in a few years and prices have dropped 40-50%, then this will be useful advice for most people. Until then, it only applies to lotto winners, trust fund babies or those buying their 5th or 6th property with a ton of equity $$$ to throw at the purchase. It certainly doesn't apply to "normal" buyers - especially first-timers.
That said, I completely agree with the "overpay" strategy. It's always best to give yourself the flexibility to cut back monthly expenses when needed due to an unforseen bill, layoff, etc. Just make sure when you sign up that there's none of this "prepayment penalty" crap. You can use the same logic for car payments, credit card payments (who ever pays the minimum on those things anyway?) etc. The downside is people who know they have this extra "cushion" built in may either (1) cut into it and revert to paying minimums (or close to them) even in good times so they've got extra play money and (2) overextend themselves saying "Oh, I can go buy those jet skis (or whatever) because I'll just stop overpaying on the house, the car and the student loan". Either scenario is bad. It only works for those who are disciplined, but it works very, very well for those who can do it. AND it'll bolster your FICO score quite a bit.