Why can't I make headway with my fixed-rate mortgage?

Question

We purchased a new mobile home 9 years ago. At that time, we financed approx. $37,000, a 30-year mortage, with the fixed interest rate of 9.25%. Our montly payment is only $300. Here it is, nearly 10 years later, we still owe $33,000 and no bank will refinance because they say the home is not worth it. SO, I've been making add'l payments, usually about an extra $25 a month. My question is, when I apply that add'l pymt. (which is on a separate check and indicates "add'l principal") why does nearly all of my initial $300 pymt. go to interest?

If I only make my $300 payment, more goes towards the principal. I'm not making headway either way it seems. I don't understand this. We were young & naive when we bought this home, and now we're stuck.

Answer 1

That's how the loan works....in your finaly year almost all of your payments will go to principal.  Adding the additional dollars is a very good idea because it's a guaranteed 9.25% rate of return.

Not counting additional payments here's your balances after...

10 years $33,235

15 years $29,575

20 years $23,774

25 years $14,578

As the balance decreases more of your payment goes to principal therefore it gets paid down more.  At $300/month you're paying $3600/year...so in the first year 9.25% on the $37000 is (rough math I know) is ~$3400 so very little went to pay down your principal, but in the 25th years only about $1350 in interest therefore more of thtat $300 is going to principal.  So those additional payments can really speed up the schedule.  An additional $25 per month here forward would knock the loan down in ~16 more years...instead of 20.

Bottom line is it's just the way the math works. Hope that helps.

Answer 2

On a fixed rate 30 year mortgage, you pay for 22 years before you are paying more principal than interest.  Doesn't seem fair.  We all have the same problem.

Answer 3

all mortgages --in the early years are mostly interest it does not go down dramatically until year 15. Look at your amortization schedule.

By the way if it is permanently affixed on your own property then FHA will refinance the property and you can put it on a 15 year note and pay about what you are paying now

I am a mortgage banker in TN & KY

Answer 4

Generally when you buy a home, the majority of your payments go to interest.  In the first years, frequently it's $10-25 for principal and it takes a long time to pay down that loan when so little goes to principal.  At 10-15 years, a larger amount should be applied because you have gradually reduced your principal balance.  Your extra principal payments should not impact your regular $300 payments as described, so suggest you speak to some one at your lender.  It's a good idea to make those extra principal payments--so keep it up.  This is the best way to reduce the amount of interest you pay--pay down the principal.  Put as much as you can into extra principal payments!

The problem with a MMH is that they depreciate over time, while generally homes appreciate.  Right now the housing market is horrible and homes are losing value or staying steady.

Interest rates are lower now than what you are paying, but refinancing costs money, too.  With such a low loan amount, refinancing wouldn't gain you much difference in payments.  Go ahead with additional payments of principal to pay down this loan.  $300 a month is very cheap housing payment.  It probably would have made a lot more sense (considering it's a mobile home, and low mortgage amount)  for you to get a 15 year loan when you bought rather than a 30yr, and the payments wouldn't have been much higher, either.

Answer 5

The high interest rate is hurting you.  You can google amortization calculator and plug the numbers in and you'll see why  you still owe so much on your home.  Even though you've paid rougly $35,000 over the last 10 years only  $4300 of it has went towards principal.

To put it in perspective, this year, only $700 dollars of your payments will go towards principal.  

I'm no financial expert, but I would definately consider re-financing. If that's not an option, throw an additional40-50 dollars more towards principal each month.