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mortgage prepayment

Interest rates on cash are so low that making a year's worth of payments on my mortgage (15 year fixed at 5.5%) makes sense, but I think the way fixed rate mortgages work is that making large payments reduces the number of future monthly payments to be made but does not permit you to skip payments. So I would not be able to skip making payments for a year.

I wonder if anyone offers amortizing mortgages where extra payments allow the borrower to skip payments for a period of time (but not falling behind the amortization schedule). This would be different from the option adjustable rate mortgages that allow borrowers to fall behind the schedule of equivalent amortizing adjustable rate mortgages.

Reply to
beliavsky
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correct

Even if someone ofered such a service, they would be unlikely to offer you a better rate than the one you would earn at your own bank.

Reply to
Igor Chudov

My recollection (late 1980's) was that "extra payments" go to reducing the principal. For "normal" payments, the part allocated to interest is based on the outstanding principal, the rest of the payment is applied to the principal.

My 1971 30 year mortgage, from what was a S&L, had a 29 year amortization schedule so that if you missed a payment, the mortgage could still be paid off in the maximum (by law?) 30 year period without a need to do what today is called a re-fi.

Reply to
Avrum Lapin

My bank (Citizens) offered a no-point no-closing "home equity loan" with a fixed 15yr 5.24% amortization. It works as you are suggesting. If I make 2 payments, the next due date moves out by 2, and the interest accrues on a daily basis. Unlike a standard mortgage, where paying a few days early or late does not impact the payoff, the daily accrual changes that. With the same bank offering me a Prime minus 1-1/4 HELOC, I paid the larger loan ahead by 12 months from the HELOC. If they freeze the HELOC, I just will make the regular mortgage payments to the HELOC and will still come out ahead. For a fraction of a percent this is a waste of time, but for 2.5%, I'll play around. Joe

Reply to
JoeTaxpayer

Correct. The term you're looking for is "curtailment" - the remaining life of the mortgage is shortened, but the payments do not change.

I don't know of any that let you skip a payment. I do know that some have in the past had an option to apply principal in a way that lowered your mortgage (and monthly payment) but left the term intact. You couldn't do so in the first year or two of the mortgage, and you had to pay a fee of some sort (a couple of hundred bucks, IIRC). But unlike a curtailment, this kind of prepayment did affect what you owed the next month.

In general, unless folks have a substantial emergency cash fund handy - or they are about to pay it off *completely*, I do not encourage prepayment of that mortgage. Money used to prepay a mortgage is highly illiquid. And nowadays, folks are coming to realize that having a HELOC doesn't count for much as emergency liquidity, as HELOCs are getting frozen all over the place.

When you need it, there's no substitute for cash. Home equity (generated through prepayments or otherwise) certainly is no substitute.

Reply to
BreadWithSpam

One more thing about this - just to clarify - your payment does not change, but come tax time, there is a potential effect: less mortgage interest. If you prepay principal, then each mortgage payment after that has more principal and less interest than there would have been had you not prepaid.

In reality, this effect is likely to be quite small unless it is a very substantial prepayment, and not everyone even itemizes in the first place. But it is something to keep in mind and does speed up the day when your mortgage interest may not be enough (in conjunction with other deductible items) to justify itemizing.

Reply to
BreadWithSpam

DA had written this in response to

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------------------------------------- snipped-for-privacy@aol.com wrote:

I also think that paying a part of that 5.5% mortgage would be a wisest investment these days. I would be careful about assuming where the payment will go though. In fact this past summer I did send Wells Fargo 2+ months of mortgage payments assuming (don ask why) that the money would be applied to the principal. I was trying to bring the principal up to above

20% to eliminate the PMI. However, what WF did is they paid themselves twice first (as in taking interest as if it was TWO separate monthly payments), then applied the difference to the principal which then kept it still under 20% and I ended up paying for another month of PMI. It got me little agitated because of that extra month of PMI but it did have an effect that you might be seeking: the due date on my next bill was two months out, so I could in fact skip the payment that was immediately after the lump sum payment.

End of my 2c

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Reply to
DA

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