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From: johnson@saturn.UUCP (Mark Scott Johnson)
Newsgroups: net.invest
Subject: Re: Mortgage payments question
Message-ID: <2327@saturn.UUCP>
Date: Fri, 31-Aug-84 12:01:31 EDT
Article-I.D.: saturn.2327
Posted: Fri Aug 31 12:01:31 1984
Date-Received: Mon, 3-Sep-84 09:18:46 EDT
Organization: Hewlett Packard Labs, Palo Alto CA
Lines: 46

There are, as usual, several schools of thot on the issue of prepaying
the mortgage on your personal residence.  The primary argument in favor
of prepayment is that you "save money" over time.  (In my opinion, this
is really only true if you intend to pay off the entire mortgage--which
very few people actually ever do.  After all, your payments only *stop*
sooner; they don't go *down* with prepayment.  ARMs might be different.)
The other big argument in favor of prepayment is "financial security":
You don't need to worry about deflation making your payments huge in
relation to your decreased buying power, for example.

The primary argument against prepayment has nothing to do with the change
in distribution of your payments between interest and principle (altho
that is a secondary argument).  Rather, the rationale is that if you have
a good, assumable loan, your chances of selling your house on the best
terms are directly proportional to the principle balance on your mortgage.
(Think about how eager current buyers are to pick up houses with assumable
loans under 10%.  In many part of the country owners of such houses can
"name their own prices".)  But who's to say this will continue to be true?

[By the way, even if you're a believer in imminent deflation (very popular
in financial circles these days), you may still not want to pay off your
mortgage.  Traditionally, in deflationary times the value of real estate
declines.  The decrease in value of your house comes out of your equity
first (remember, banks lose on inflation but win on deflation, loan-wise).
The more equity you have, the more *you* lose before the bank starts losing.
Of course if you're a *real* believer in deflation, you won't even *think*
of owning real estate!]

Not prepaying probably makes most sense if 1) you intend to keep the house
under 10 years, 2) you believe inflation is more likely to occur within the
next 10 year than is mild deflation, and 3) "owning it free and clear" does
not have a particularly strong emotional ring to you.  Otherwise, prepaying
is probably wise for you, if you have the money.

But whatever you do, READ YOUR LOAN PAPERS!  Some banks impose prepayment
penalties if your prepayments exceed a certain threshold per month or per
year.  I've even heard of banks that consider additional monthly payments
to be prepaid *interest* (even tho the IRS probably won't let you deduct it
as interest) instead of prepaid *principle*!  If this is your case, it make
virtually no sense at all to prepay unless you're prepared to sue the bank
over this clause in your loan contract.
-- 
Mark Scott Johnson
CSnet:   Johnson@HP-Labs
ARPAnet: Johnson%Hp-Labs@CSnet-Relay.arpa
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