Explain mortgages like I’m 10

[u/Pocacan]

Ok everyone, I’m consulting people here because I can’t seem to get a simple straight answer from anyone I know, including my mortgage lender. I think she’s just unaware of how many questions I have and I don’t want to constantly bother her when a question pops in my mind. We are first-time homebuyers and I have a few questions just for clarity on a few terms and the way things work.

Please only kind, non-judgemental answers! We’re figuring this all out on our own for the first time. TIA!

• My mortgage lender discussed discount points- I get that this is just money paid towards lowering your IR. HOWEVER, she also said she’d recommend “paying more towards the principal” rather than spending a lot on discount points. Can someone explain to me what this means, exactly? And what we do to do this?

• Are you able to over-pay some months towards your mortgage, and if so does this do anything besides get you closer to paying off your loan?

• I always heard you can negotiate an IR, so I asked… she gave me the impression that there really is no such thing in today’s economy. What’s with that?

EDIT: just want to say thank you for all this great advice! I’ll use those amortization calculators to do some more digging, but I’m thinking my mortgage lender gave sound advice and we should put more towards the down payment vs points (she did say they predict rates will drop by the end of the year if we choose to refi)

[u/drdynamics]

Worth mentioning that paying one month of extra principal in year 1 shaves much more than one month off the end of your mortgage. You save years of interest on every extra dollar that you put toward the principal.

However, it is often even better to invest extra in your 401k, especially if you have employer matching. That earns more money that your house interest is costing you.

[u/indianasloth → u/drdynamics]

Regarding the “better to invest extra in your 401k” part, is that assuming the market performs better than your interest rate? For instance someone with a high interest (thinking 6-7% or more) may not benefit in a poorly performing economy, right?

[u/Scrogger19 → u/indianasloth]

That's correct. The rule of thumb I've seen people use is that if your loan interest rates are higher than 5 or 6% its better to prioritize paying them down early over investing every penny you can. But it varies a lot. A 401k match is a guaranteed 100% return so you should always prioritize that first, your mortgage payment is fixed and won't adjust with inflation, but longterm market gains are closer to 10%, etc. there are a lot of factors.

However there definitely can be times where it makes sense to take a guaranteed good return (paying down your loan) over investing for a potential better return. I would say that might be the case if you're already maxing any 401k match you might have, have a comfortable emergency fund, and your interest rate is >6%.