Borrower beware! (Student Loans)

<p>You are all getting the idea. But remember the 6th variable: What are the terms and Who controls the terms.</p>

<p>Most of us look at what is out there for mortgages: What is quoted is "comforming" mortgages because the bank-broker, financial institution gets to pass the risk off to someone else and because the sales people get paid on such. So what about non-comforming mortgages? And why are noncomforming mortgages more common? A comforming mortgage is a "scheduled," "precomputed" interest loan. A noncomforming mortgate is a loan that the interest cannot be scheduled or precomuted because the balance and payoff date is always changing. A noncomforming loan to the mortgage industry is called a "SIMPLE INTEREST" Loan. People shy away from simple interest loans because of the higher interest rate and because this type of loan is marketed to people with lower incomes and FICO scores. </p>

<p>The Stafford and PLUS loans are also simple interest calculated, variable interest loans, indeterminate payoff date. A Consolidation loan is a simple interest calculated loan, fixed interest, determinate payoff date ( but can be made indeterminate). So, those of us who have Staffords, PLUS, and consolidated loans, we have exacted what we have been taught not to have in a mortgage. Yet everyone is extremely happy with Stafford, PLUS, Consolidated loans because of their flexibility. </p>

<p>Free your bonds. Open your minds and you too will see the light. Hallalula !</p>

<p>No, no, no... that's not how it works! </p>

<p>chocoholic says"""putting an extra $1000 each month towards your principal does nothing to change your monthly payments, or the amount of interest and principal that is already calculated, until you reach that last payment, and finish paying off the principal."<br>
(sorry, I still don't know how to quote you guys!)</p>

<p>chocoholic, that's not correct. Putting an extra $1000. a month towards the principal does change the the amount of interest that is calculated on the principal for the next month, because the remaining principal is reduced - therefore less interest. It's true that it doesn't change your monthly payment. But the portion of money from your regular payment that goes to principal increases considerably - not just from the extra dollars that you send in for a direct payment to principal, but because it bumps you further down the amortization schedule. That doesn't happen if you sock it away in savings - plus you get taxed on your interest in a savings account. Check out an online amortization schedule and you'll see what I mean.</p>

<p>chocoholic says"""putting an extra $1000 each month towards your principal does nothing to change your monthly payments, or the amount of interest and principal that is already calculated, until you reach that last payment, and finish paying off the principal."
(sorry, I still don't know how to quote you guys!)</p>

<p>I agree with anxiousmom.</p>

<p>We refinanced our mortgage from a 30 year to a 25 year loan when interests went down. Although we had somewhat higher monthly payments, the total interest went down considerably. We also made extra payments a few times, and we were thus able to shave off several months off the mortgage. As time went on, the proportion of principal to interest went up considerably.</p>

<p>Comforming loans have attractive interest rates for a set period of time in exchange for regular monthly fixed payments. They have set conditions.</p>

<p>Noncomforming, simple interest says > pay interest on what you owe. That's it. No set conditions. (Plus,staffords, consolidations student loans) </p>

<p>Chocoholic , you are correct. So inorder to alter the conditions you must change the program. For many of those who refinance recently, there is little that can be done, unless some other factors come into play. </p>

<p>I try help those people who are willing explore different designs. Its hard to change the shape of the house when the concrete is already poured.</p>

<p>Love chocolate. But getting to be a sensitive type 2 diabetic.</p>

<p>I'm sorry, Marite and Anxiousmom,
but no lender is going to recalculate your principal/interest each month. I know this for a fact.</p>

<p>Chocolohic: As I posted on another thread. "Let no one stand in the way of your goal, especially if you pay him." </p>

<p>Not looking hard enough.</p>

<p>The entire amortization schedule is based on the amount that you are borrowing on your closing date. If you choose to throw in extra money every month, or whenever you have some to spare, your amort. sch. will not change. All that happens is that your principal will get paid off in 12 years instead of 15 years (as the case may be), and that's when your interest payments stop.</p>

<p>SO, you are better off, doing something else with the money, including putting it into CD's, and then, in 13 years (or whatever), using the $45,000 you saved, to pay off the $45,000 balance in your principal.</p>

<p>Reference assignment source: Federal Reserve Bank of Philadelphia.</p>

<p>Chocoholic, If CDs pay less than your mortage, why isn't it better to pay down your mortgage (Unless you need the financial flexibility)?</p>

<p>Are you saying if a person prepays his mortgage every month, the interest payments are still based on the original money borrowed? For example, I have a $300,000 mortgage. I pay off $30,000 of the principal 15 years early. Am I still paying interest going forward on the $300,000 amortized and not the $270,000?
So, in effect, by prepaying, I am raising my interest rate?</p>

<p>Well, my pension and my kids' college savings really tanked around 2000, so I was not better off putting money in stocks. Might have done better with CDs.</p>

<p>
[quote]
Are you saying if a person prepays his mortgage every month, the interest payments are still based on the original money borrowed? For example, I have a $300,000 mortgage. I pay off $30,000 of the principal 15 years early. Am I still paying interest going forward on the $300,000 amortized and not the $270,000?

[/quote]
</p>

<p>Yes, that part is right.</p>

<p>
[quote]
So, in effect, by prepaying, I am raising my interest rate?

[/quote]
</p>

<p>You are basically borrowing $300,000 from your lender, and paying interest on that, but then turning around and giving that same lender an interest-free amount of $30,000. Instead you should give him this $30,000 at that point in time when you have $30,000 left as your balance principal.</p>

<p>And you are losing whatever interest you may have earned on your $30,000. Or some other debts that you could have paid off.</p>

<p>I had no idea this was true. Nobody should be partially prepaying their mortgages. What a rip off.
You either pay it all off, or stay on the schedule.
These people paying off their 30 year mortgages slowly to make them similar to 15 year mortgages are really getting screwed.</p>

<p>Well, sad to say Marite, with all of my genius comprehension here on the mortgage situation, we also put our money into stocks, and Puff the Magic Dragon came along!</p>

<p>Any mortgage I ever had, if you pre-pay the principle amount for the month you shorten the life of the mortage by a month. So if you had a loan with a $1000 payment and half of that went to principle and half to interest, for every $500 extra you paid you would shorten your mortgage by a month. The principle portion of the loan payment changes each month. The reason this works is because the banks do calculate your interest portion of the payment upon the balance of the principle owed each interest period (month in most cases) and when you pre-pay you reduce the principle owed. If you pre-payed the entire principle you wouldn't owe any interest at all. Pre agreed to payment amounts won't change on most convential mortgages until the last payment, which could be less depending on circumstances.</p>

<p>Why would anyone pre-pay a mortage at today's fixed rate? Perhaps to put them in a better cash flow situation when they retire?</p>

<p>Sorry, I was not clear. The interest rate is not recalculated; but the proportion of your payment that is interest changes. </p>

<p>Here is an example (figures have been rounded down):
principal 1159; interest 1956;
principal 1166; interest 1949;
principal 1173; interest 1942<br>
and so on.</p>

<p>
[quote]
The principle portion of the loan payment changes each month.

[/quote]

Yup, that's right. Your total monthly stays the same, but the ratio of interest to principal keeps decreasing.</p>

<p>
[quote]
banks do calculate your interest portion of the payment upon the balance of the principle owed each interest period (month in most cases) and when you pre-pay you reduce the principle owed.

[/quote]

Unless you had a special arrangement, that I have never heard of, your lender will give you an amortization of the loan for the entire duration, and the monthly interest as calculated on the date of closing, while it goes down every month, based on your ever-reducing principal, will not change based on extra $$ you choose to put in.</p>

<p>
[quote]
If you pre-payed the entire principle you wouldn't owe any interest at all.

[/quote]

Duh.</p>

<p>
[quote]
Pre agreed to payment amounts won't change on most convential mortgages until the last payment,

[/quote]

So, you do see it then?</p>

<p>I want to apologize for the "duh". Sorry.</p>

<p>Chocoholic:</p>

<p>The volatility of the stock market made me happy that I paid off my mortgage early. If I was not getting interest from stocks, at least I was no longer paying mortgage interest.</p>

<p>stocks do not give "interest", stocks give dividends.</p>

<p>Semantics counts heavily in this game.</p>

<p>reading reference: 1040 Federal Tax Instructions.</p>