If you have a mortgage, you may be wondering, ‘why do banks want you to pay off interest before principal?’ Keep reading to find out more.
Why Interest Before Principal?
Banks are looking for you to pay off as much of your loan balance as possible. By doing so, you can reduce the amount of interest they need to pay to cover the amount you owe. By paying off interest, they can add to the principal balance and reduce the good they have to pay. Why would they want to do this? If the bank can reduce the interest they have to pay you, they can pass this cost to you. The banks, therefore, have two choices; they can either charge you the whole amount of interest or charge you more money. If they charge you less, they can then make more profit by charging you more.
To make money, banks need to convince their customers that paying off interest before the principal and keeping their loan balances the same is not in the borrower’s best interests. The reason banks can convince their customers of this is because most consumers are unaware that interest on loans is charged the very same as, or even more than, principal, which is why many of them think that a principal payment is paid before the interest. This practice of banks making a little extra money before the principal is due on the part of the bank is entirely legal.
The Financial Benefits
There are many benefits to paying off interest before principal, one of the biggest being the money that you save. For example, if you only pay off interest your first year, you will have saved yourself thousands. If you paid off your whole mortgage and then your mortgage was refinanced, the amount you would save in interest would be even more significant. However, there are several other perks you could enjoy from paying off your mortgage before your lender. In addition to saving you money, you could also reduce the cost of your mortgage in other ways. If your lender puts an annual charge on your mortgage, you could avoid this charge by paying off the interest. If your mortgage is paid off, you could also reduce your mortgage insurance premiums.
Why Is This Strategy Important?
Interest is one of the most essential costs incurred by the bank; in fact, the bank may spend more on interest than on the principal of the mortgage, the money loaned. The interest is more visible than the principal, so it attracts more attention. Let’s examine some other ways in which the bank is often reluctant to grant you the loan and the logic behind this cost-savings decision. Banks like to have a low cost of funding and pay less for your funds. Keeping you on the hook for interest charges makes it more difficult for them to do this. Many people end up paying more than the principal amount they borrowed because they fell for this trick.
Contact Utah Sell Now
Now that we’ve answered the question, ‘why do banks want you to pay off interest before principal?,’ contact the experts at Utah Sell Now today. We buy homes in the Salt Lake City, Utah, area in any condition fast and in cash so you don’t have to go through the hassle of staging and showing your home, or paying a realtor. Call us for your no-obligation written offer and you could have money in hand for your home in as little as seven days.