How does my mortgage lender treat house prepayments

- I
- Igor Chudov
  
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posted
15 years ago

Wed, Mar 4, 2009 4:22 PM

For the last year, I have been adding a little bit of extra to my house payments. I have a 15 year fixed rate mortgage that I obtained at 4.875% a few years ago.

When I carefully looked at my statement from the loan servicer, I realized that the next "due date" is June 1.

So, it appears, that the way mortgage lender treats my extra payments is to just permit me to pay next payment later.

Based on a gut feeling and without deep analysis, it would seem that it permits the bank to collect full 4.875 interest on my entire balance, and hold my extra money for free.

So, my thinking goes, I would benefit from asking the bank to instead apply this surplus to my principal. The downside is that after doing so, I would no longer be able to defer my payments in case of, say, job loss.

I called the bank about it yesterday, and the employee told me that yes, I have an option of applying this surplus find to the principal.

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- Douglas Johnson
  
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posted
15 years ago

Wed, Mar 4, 2009 6:08 PM

Isn't that nice of them. So kind.

If your emergency fund is adequate, there is no point in making an interest free loan. If the emergency fund is a little light, perhaps you could ask the bank to return the surplus and add it to the emergency fund.

-- Doug

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- JoeTaxpayer
  
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posted
15 years ago

Wed, Mar 4, 2009 6:32 PM

The payments should have specified you were pre-paying principal. Banks usually don't advance the due date after a series of partial payments, but you should question them to understand how the interest accrues.

My first mortgage was written as a Home Equity Loan, fixed rate, and I carefully did the math and watching the account concluded that making advanced payments in fact lowered the interest accruing. So by paying a year ahead, I effectively earned the mortgage rate on the funds instead of having that money earn 1% at the same bank. Most mortgages do not calculate this way.

Joe

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- Igor Chudov
  
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posted
15 years ago

Fri, Mar 6, 2009 8:28 PM

I have decided to not do anything drastic. In the light of the latest big economic deterioration, I think that I will be better off with extra cash than with prepayment on the house. I also tend to be biased towards believing that inflation is coming.

Therefore, I will simply skip several bank payments to get myself roughly on track with payments schedule. In a few months, I will have a cash surplus about equal to my earlier prepayments. I will consider the relatively minor cost of this mistake to just be considered to be the cost of my disorganization.