[mamadonna]

We are in the process of buying a home. The loan we're getting is a fixed rate 30 yr. mortgage, an 80/17/3: 3% downpayment, 80% first, and 17% second. The interest rate on both the 1st and 2nd is the same (5%), but payments on the 2nd are deferred for 5 years. Interest will accrue, though, and at 5 years, it will be added to the principle amount and the loan will be amortized for the remaining 25 years.

Our payments (for the first 5 years especially, but even from 5 years on) will be significantly less than what we are paying in rent right now. This includes mortgage, taxes, insurance, and projected maintenance expenses (there is no PMI on this loan).

If we decide to make extra payments on the loan, I am not sure if it would be better to apply the extra payments to the principle on the 1st loan, or to the interest that is accruing on the 2nd loan.

I haven't found any ready-made online calculators that I think could figure this question out for me and, while math and I can get along when necessary, we're not the best of friends, so I really can't figure out how to figure this out for myself. I'd love a little help! Thanks.

 

[mightymoo]

I'd say the 2nd. From an interest standpoint, with both being the same rate, the interest is accruing the same, but with payments deferred on the 2nd, you are not reducing the principle at all, so I'd be inclined to put extra toward that one first. Also, I think just for the orderliness of my mind I'd want to pay off the 2nd first and get down to a single mortgage.

That said, I have to put my standard disclaimer. I would not pay down either until you have a significant emergency fund. In today's economy especially, an emergency fund is very necessary - not the $1000 starter emergency fund some folks talk about to wean off high interest credit card debt. A solid 6+ months of expenses. The problem with paying down a mortgage is that yes, it will save you interest over the long run of the mortgage, but you cannot get the money back if you need it. If you save the money, if you lose your job, you can still pay the mortgage and your other bills for a few months to get you through until you get another job. If you use the money to pay down the principle, when you lose your job the mortgage company is still going to expect that money on time and you run the risk of being foreclosed upon. You may already have this, of course I just like to point that out.

 

[Kyamo]

Since they are both the same interest rate, in the long term it shouldn't make any difference. However, is it true that the payments on the second loan are not determined now, but will be calculated in 5 years depending on the balance then? If that's the case then paying extra on the second loan will result in lower payments on that one once you start paying in 5 years. (Paying on the first loan will not change the payments, instead they would get the loan paid off earlier than 30 yrs.) If you pay on the second loan now, then if things end up being tight in 5 years you will have more wiggle room. And if they aren't tight in 5 years, then you can just pay that extra to the mortgage.

 

[mamadonna]

Thank, mightymoo and Kyamo.

In actuality, we probably won't put extra payments toward the mortgage, at least at first, because we do have other places the money should go, but it's been bothering me that I can't wrap my head around which would be better.

That is a really good question about when the payments on the 2nd will be determined. Our loan officer has always just calculated the payment amount for us assuming that no payments are made on the deferred interest. I will have to double check whether paying on the 2nd loan during the deferred period will result in a lower payment amount after the 5 years.

 

[KatieBonita]

http://www.commbank.com.au/tools/hom...asp?type=Split
I was using this calculator this morning to figure out how much to put in fixed and how much to put in variable. Perhaps it might be of some help?