Which to pay down: 1st or 2nd mortgage?
| I bought a home in California in February 2006 for $400,000. I financed with a 10-year interest-only mortgage with a rate of 6 percent and a 15-year equity loan with a rate of 9¼ percent. I would like to make extra monthly principal payments on one of the two loans but don’t know which one it would make more sense to pay extra on. Please advise. |  |
Figure out if either loan has a prepayment penalty associated with additional principal payments. It’s possible that, even for loans with a prepayment penalty, you can make some additional principal payments and it won’t trigger the penalty. An extra $100 per month, for example, may not trigger a penalty. With no penalty to consider, it’s a slam-dunk to pay down the loan with the higher interest rate. Even though the lower rate loan is interest-only, making additional principal payments saves you the interest expense on that payment. You’d rather save 9¼ percent on the additional principal than 6 percent.
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