Can mortgage prepayment reduce minimum payment?
Jack Steele
minimum "principle + interest" payment or is the only benefit that you
pay off your lown faster and potentially eliminate PMI payments.
BreadW...@fractious.net
The latter.
Some loans have a deal where you can make a principal payment
which actually lowers your monthlies instead of shortening
the life, but it's not a feature of many (or even most, as
far as I know), and may come with a fee of some sort.
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Leigh Menconi
news:9fe528e.04042...@posting.google.com...
> If you prepay principle on a mortgage, will the bank reduce your
> minimum "principle + interest" payment or is the only benefit that you
> pay off your lown faster and potentially eliminate PMI payments.
>
Prepayments just pay down the principal faster (which can allow to you build
equity faster and eliminate PMI as you point out). Prepayments do not affect
the monthly payment unless you refinance the lower principal amount.
Leigh
Ron Peterson
It depends on the terms of your bank loan. Good terms would have a
prepayment reduce the principal of the loan and its associated interest.
In addition, prepayments should allow you to skip making payments for a
while if you are short on funds.
--
Ron
John A. Weeks III
Leigh Menconi <lmen...@earthlink.net> wrote:
> "Jack Steele" <jackste...@hotmail.com> wrote in message
> news:9fe528e.04042...@posting.google.com...
> > If you prepay principle on a mortgage, will the bank reduce your
> > minimum "principle + interest" payment or is the only benefit that you
> > pay off your lown faster and potentially eliminate PMI payments.
> >
>
> Prepayments just pay down the principal faster (which can allow to you build
> equity faster and eliminate PMI as you point out).
Not always the case. In many cases, if you just send in additional
money, the bank will treat it as payments in advance. For example,
if you send in your March payment on time, and include an additional
$100, the bank may choose to apply it to the April payment.
When you send in additional money, it is best to send it as a separate
check, and clearly indicate with a short letter that it is addtional
principal. Failure to do this carefully might lead to a big surprise
further down the line.
-john-
--
====================================================================
John A. Weeks III 952-432-2708 jo...@johnweeks.com
Newave Communications http://www.johnweeks.com
====================================================================
Elizabeth Richardson
>
> When you send in additional money, it is best to send it as a separate
> check, and clearly indicate with a short letter that it is addtional
> principal. Failure to do this carefully might lead to a big surprise
> further down the line.
Back when I was making mortgage payments, we had a payment book. We sent in
a coupon with each payment and on that coupon you were to indicate the
amount of your payment. There was a line for additional principal on the
coupon. No need for a letter. Our additional principal payment did not
reduce any further payments, though just got the darn thing paid off faster.
Elizabeth Richardson
Michael Sullivan
Most banks will operate this way, or assume that an overpayment goes to
additional principal, which is almost always what's intended.
But some banks are slightly unscrupulous, and according to the letter of
the contracts, they may (probably) be able to consider your overpayment
to be for whatever is most convenient for them, unless you specify on
the check, payment coupon or separate letter that it is for additional
principal.
It is possible for them to stick it in the escrow account, if they are
escrowing for property tax or insurance, etc., and it's possible to hold
it in a non-interest bearing account to pay the next payment and so on.
In all these cases, the bank is basically stealing your interest, and
it's perfectly legal. Most won't do it, but John is absolutely right to
be careful to specify what you are doing, because some banks or mortgage
companies will screw you this way if you don't and you would have little
or no recourse.
Obviously if there is a spot on the payment coupon or bill stub to show
additional principal, then filling that out should do the trick, without
needing a letter.
Michael
Michael Sullivan
Except it's very rare to have terms like that, IME. You'd need to check
with your bank about it. Most of the time, to get a lower payment,
you'd have to refinance.
matt noone
thing you can do. While they reduce your principal, they do not
change the amount of interest you owe on each payment because that
amortization schedule is created at the beginning of the loan. Thus,
my extra payments just went into the bank's coffers. I received no
economic benefit from that money. Now I set aside the extra mortgage
principal payment in a savings account where it earns 2% interest and
is always available to me. In six years, I will have enough aside to
pay off the balance of my mortgage. I can then decide whether I want
to pay off the mortgage or not. In the meantime, I have full access
to this money and it is earning me interest income. I could kick
myself for not realizing the stupidity of paying extra mortgage
payments to the bank sooner.
Rich Carreiro
> I learned the hard way that extra mortgage payments are the dumbest
> thing you can do. While they reduce your principal, they do not
> change the amount of interest you owe on each payment because that
> amortization schedule is created at the beginning of the loan.
Unless you have an incredibly bizarre mortgage, you're wrong. While
the total monthly payment is set in stone, the principal and interest
portions of that payment most certainly are not.
> Thus, my extra payments just went into the bank's coffers. I received no
> economic benefit from that money.
See above.
The interest component of a mortgage payment is NOT predetermined by
the amortization schedule. It is computed from scratch every month,
and is the loan balance on a specific date of the month times the
monthly interest rate. Now, if you never make an additional principal
payment, then yes, the interest component of your payments will
exactly track the amortization schedule.
However, you make additional payments of principal, the principal
balance will drop by more than it would have if you did not make the
payment. Likewise, the interest portion of the payment will drop more
than it would have otherwise and will be less than the amortization
schedule shows. Every pre-payment of principal will reduce the
interest part of your monthly payment further and further below what
was in the amortization schedule.
Read the promissory note you signed when you got the mortgage.
Mine says that:
(a) Each month I have to pay the interest on the unpaid balance,
and the interest is computed at a fixed annual rate of X%
(b) The monthly payment shall be $Y
So (a) means I will never pay more interest than I'm supposed
to. It says right there in black letters that the interest
I pay each month is the unpaid balance times the interest rate.
Obviously, a pre-payment must reduce the interest below what
it would have been if I had not made the pre-payment, or else
my bank is breaching the loan contract.
And since (b) requires the monthly payment be fixed at $Y,
the portion of the payment that is principal will be higher
than it would have been otherwise since (a) required the interest
portion to be lower than it would have been otherwise.
And yes, I do make extra payments of principal on my mortgage and it
works exactly as I describe.
--
Rich Carreiro rlc...@animato.arlington.ma.us
John A. Weeks III
noone <mtn...@netzero.com> wrote:
Nearly all loans allow you to pre-pay principal. It would be
unusual to find one that doesn't these days. Perhaps you have
one of these odd loans.
For most people, however, paying additional principal will knock
off payments at the end of the loan. You then save the interest
that would have been paid on these payments. The bank does not
re-amortize your loan each time you make an extra payment, so
you don't see the effect right away.
BreadW...@fractious.net
> I learned the hard way that extra mortgage payments are the dumbest
> thing you can do. While they reduce your principal, they do not
> change the amount of interest you owe on each payment because that
> amortization schedule is created at the beginning of the loan.
> Thus, my extra payments just went into the bank's coffers. I
> received no economic benefit from that money. Now I set aside the
That's not true. If you told your bank that the extra payments
were principal, the life of your mortgage was shortened. Since
your principal is lower, the proportion of principal and interest
coming from your monthly payment changes. In fact, the proportion
of principal and interest changes _every_ month, since part of
each payment is principal. Extra principal speeds that up.
Your payments do _not_ go down. But you'll pay off the mortgage
sooner. This may or may not be of importance to you.
Ed Zollars, CPA
> I learned the hard way that extra mortgage payments are the dumbest
> thing you can do. While they reduce your principal, they do not
> change the amount of interest you owe on each payment because that
> amortization schedule is created at the beginning of the loan.
As others have noted, that would be a highly unusual loan--it would
suggest that if you "paid off" the loan principal entirely, you'd
still end up having to write checks for the "interest" over the
stated term of the loan (meaning essentially you couldn't sell the
property for however long the term of the loan was).
Any mortgage I've looked at recently in written the way that Rich
described it--you owe interest of X% based on the principal
outstanding each month and must make a fixed payment of $Y each
month until the loan is paid off.
A prepayment of principal won't generally reduce your *payment*
(that is fixed) but it will reduce both the interest component of
future payments *AND* shorten the period of which payments will be
made. Some people confuse the fact that the payment doesn't go down
with the idea that the interest being paid didn't go down--but the
dollars going to interest are lower.
Now, as some have commented, I suppose you may find a lender is
holding your prepayments and only applying them to future payments
as they come due unless you explicitly noted you were making an
extra payment on principal.
--
Ed Zollars, CPA
Phoenix, Arizona
BreadW...@fractious.net
> Now, as some have commented, I suppose you may find a lender is
> holding your prepayments and only applying them to future payments as
> they come due unless you explicitly noted you were making an extra
> payment on principal.
And your payment coupon - which you enclose with your check -
should have a line on it explicitly for noting what to do
with excess payments - whether they should go to your escrow
account, to principal, etc.