Paying down mortgage: Best way to make monthly payments?

[Amethyst]

When paying extra on your mortgage principal, should it make any difference whether you a) add the extra payment to your regular monthly payment or b) remit the extra payment separately?

My amortization spreadsheet says the 2 should result in the exact same rate of paydown.

However, my credit union informed me that if I include the extra payment within my regular payment, all I am doing is "pushing off your next payment." [As of now, my next payment isn't due till June 2010]. They said I needed to call a customer service rep every month, and have the rep make a transfer from another of my accounts, if I want to get credit for an extra principal payment. The credit union people kind of mumbled when I asked for the math. The attitude was basically, "That's the way it is and we're only trying to help."

Based on their records, my balance is indeed being lowered at a slighly lesser rate than my spreadsheet says it should be. The difference is only ~$10 per month, yet over several years, that adds up. Also it's a nuisance to have to transfer funds every month to my credit union, then call them to make the extra principal payment for me.

Thoughts?

 

[Alan]

That seems very strange to me. Like you I used an amortization spreadsheet to calculate what I owed, and I used it to see what I needed to pay each month to pay off the mortgage at a particular date (the month that DD graduated from High School).

I then simply increased my auto-debited monthly payment and the statements from the bank always matched what I expected. Also, the bank that owned the mortgage changed a couple of times during this period of about 5 years with no issues.

 

[W2R]

When I paid mine off early, I submitted the extra payments separately. I labeled each check and payment slip "PLEASE APPLY TO MORTGAGE PRINCIPAL ONLY" in big letters.

If they apply it to the principal, and not the interest, then it isn't just delaying the payments. You want it applied to the principle. Chase provided extra payment slips in case you wanted to do that and whenever I sent one in with a payment, they would mail me a few more. I think that these extra payments may have even been sent to a different address than the regular monthly payments, though. These were completely separate.

What I did was to send odd amounts, as much as I could save, every few months whether it was $13,200, $5,000, or what. I would just skim off the excess in checking, rounded off to the nearest $100 and send it in when the spirit moved me no matter what day of the month though usually it was at the same time as my other (regular) payment.

Chase's computations agreed with mine, no more than a penny or so off.

 

[DblDoc]

+1 to W2R's post. Send in separate check clearly identified as against principal.

DD

 

[bizlady]

Check your agreement to be sure you can prepay. Extra should be going to principal.

What really helps is to pay bi-weekly- saves a bit more each month, and you end up making 13 rather than 12 payments a year.

 

[Midpack]

Shouldn't make any difference, but you have to look at your mortgage contract. We paid off our mortgage a few years ago (yay), the payment was about $1,230/mo and we just sent in $1,500 every month. We never told the bank anything, but it was paid off more than 10 years ahead of schedule. We did check to make sure there was no prepayment penalty before we started, but that's about it. I don't understand how the excess could possibly go to anything but principal, but maybe I'm missing something...

 

[bubba]

I make our payment online, and the data page for payments on the mortgage holders website has a place for "regular payment", "extra principal". I complete both sections and as best I can tell, the extra principal is being directed as intended.

 

[utrecht]

Instead of making higher payments each month, I just invested the extra amount into a mutual fund each month. When the value of the mutual fund eclipsed the payoff of the mortgage, I did a little happy dance and then was still able to decide if I wanted to pay it off or keep the lump sum invested.

I figured I could pretty easily beat the 5% I was paying in mortgage interest and left the money invested instead of paying it off.

And I didnt have to deal with a moron not knowing the proper way to apply extra payments to a mortgage.

 

[lucija]

When paying extra on your mortgage principal, should it make any difference whether you a) add the extra payment to your regular monthly payment or b) remit the extra payment separately?...

I have done both, sometimes within the same monthly cycle. It really made no difference in our case. Our bill clearly stated that any $ above standard payment, unless specifically labeled, will be applied as follows: (1) outstanding fees, if any (2) principal.

If this is not the case for you... send a separate check labeled "principal only.

 

[IndependentlyPoor]

However, my credit union informed me that if I include the extra payment within my regular payment, all I am doing is "pushing off your next payment." [As of now, my next payment isn't due till June 2010]. They said I needed to call a customer service rep every month, and have the rep make a transfer from another of my accounts, if I want to get credit for an extra principal payment. The credit union people kind of mumbled when I asked for the math. The attitude was basically, "That's the way it is and we're only trying to help."

Man, that's cold. I can see why a C.U. doesn't like early payments, but making it hard to make them is just mean. Pushing out the next payment is a real scr*w job because you are still paying interest as if you had never made an additional payment.

 

[LOL!]

There's this "amortization schedule" thing which your regularly monthly payments come from. If you pay principal it screws up all the math. And there is probably no program on Earth or in the Milky Way Galaxy that will calculate the "pay-off amount" correctly once you do that. All errors are in the bank's favor.

So if you pay off principal early, how do you know if they have really removed the interest they are charging you on that amount? They certainly aren't changing your regular monthly payments. Sure you get to make fewer payments in the end, but did they really do the math right? Did they? Really?

 

[Amethyst]

There's this "amortization schedule" thing which your regularly monthly payments come from. If you pay principal it screws up all the math. And there is probably no program on Earth or in the Milky Way Galaxy that will calculate the "pay-off amount" correctly once you do that. All errors are in the bank's favor.

So if you pay off principal early, how do you know if they have really removed the interest they are charging you on that amount? They certainly aren't changing your regular monthly payments. Sure you get to make fewer payments in the end, but did they really do the math right? Did they? Really?

Why would the math be any more complicated than decrementing the principal each time by the extra payment? The real math (which is just algebra) is in calculating the effective and periodic interest rates, and the relationship among those rates and the payment periodicity and loan amount. Those algebraic relationships are behind the amortization function, which causes the principal and interest amounts to change each month.
Is there some other logic that I'm missing? While I'm no mathematician, I'm sure some others on the board are...can anyone explain?

 

[W2R]

There's this "amortization schedule" thing which your regularly monthly payments come from. If you pay principal it screws up all the math. And there is probably no program on Earth or in the Milky Way Galaxy that will calculate the "pay-off amount" correctly once you do that. All errors are in the bank's favor.

So if you pay off principal early, how do you know if they have really removed the interest they are charging you on that amount? They certainly aren't changing your regular monthly payments. Sure you get to make fewer payments in the end, but did they really do the math right? Did they? Really?

Just take the remaining principal (less the amount you just paid), and amortize it for the months you have left. For example, if you have a 30 year (360 month) mortgage, and intend to make a $1000 extra payment after six months, then first look on the original amortization schedule to determine the principal you have left at 354 months. Subtract the $1K from that. Then amortize the remaining principal over 354 months.

Or, you can use the calculator at Mortgage Calculator - Bankrate.com which can deal with one extra payment, extra monthly payments, etc., and gives you new amortization tables. Very painless.

If you make the extra payment in the middle of the month, it gets a little more complicated but if you like fiddling with numbers you can get pretty close. You have to go by when they deposit it.

 

[LOL!]

Sure it's painless, but is it correct?

Or better yet, did anyone use the Bankrate calculator and their bank gave them the same number? I doubt it.

 

[W2R]

Sure it's painless, but is it correct?

Or better yet, did anyone use the Bankrate calculator and their bank gave them the same number? I doubt it.

YES. That's the calculator that I used, because I was too lazy to do the amortization by hand after every payment. (When I first got my mortgage, I created an amortization sheet and checked it with the calculator.) My bank gave me within a penny or two of what I calculated each time. This is not rocket science!!! Not only that, it is just simple math, not wizardry or sorcery, either. The hard part was when I (rarely) paid the extra principal in the middle of the month. I was too lazy to figure out how to do it the right way, so I estimated and they were pretty close to my estimate though not as close as when I paid at the expected time.

Edited to add: The worst part was the final payoff. It was very hard to compute due to various fees and adjustment of the escrow and so on. Overall, Chase ended up requiring me to pay $149.45 less than I had figured to pay off the entire mortgage, including all the payments from the beginning. Up to the final payment the monthly balance was essentially the same as the bankrate calculator gave me.

If your mortgage company is not giving you proper balances every month then that is not right, and it is also not to be expected.

 

[Alan]

Sure it's painless, but is it correct?

Or better yet, did anyone use the Bankrate calculator and their bank gave them the same number? I doubt it.

I used an amortization spreadsheet I have and it exactly matched the bank's statements.

However, I didn't make extra, random, payments off the principal which will be difficult for you to match up with the bank's records as it will depend on the day the bank receives and books it. I simply increased the amount of my monthly payments and the excess above interest went against principal.

I'll be happy to share the spreadsheet.

 

[IndependentlyPoor]

It has been a long time, but I believe I used the Quicken to track my mortgage, extra payments and all. It didn't agree exactly (am I am sure that the difference was all in their favor) but seems like the amount was trivial, maybe $50 at the end.

Maybe I am missing something, but the calculation is so easy that I doubt they store an amortization sheet. Each month you decrement the balance by the payment minus the outstanding balance times 1/12 of the APR. It is probably more complicated for them if you are late or miss a payment.

Not a lawyer here, but I believe in Texas they are legally required to operate this way (no early payment penalties).

 

[Katsmeow]

Personally I am not a fan of making extra principal payments unless you already have enough cash to pay off the mortgage any time you want to.

 

[chinaco]

When we refinanced back around 2002 (lower rates), the bank offered a slightly lower rate if we used automatic transfer of payment from our bank account. They said extra principal payments needed to be made with the regular monthly payment. We setup and extra withdrawal of a few hundred bucks a month. That amount was going to cut about 4 or 5 years off the life of the mortgage. Those payments applied to the principle. The other option was to send in a payment and specify it needed to go against the principle (if done by check)... otherwise the money would be considered an early mortgage payment that would be applied to the next monthly payment.

We are in the process of paying off the mortgage (part of the ER plan). I took a very large payment directly to the bank about a month ago and asked them to apply it to the principle. They did as I requested. They also asked me if I wanted to keep the same duration for the loan and reduce the monthly payment. I declined. I wanted to keep the payment the same to reduce the principle faster. I will pay it off before the end of the year.

We will be debt free!

FIRE here I come.

 

[DAYDREAMER]

I created my own Excel spread sheet to track my extra principle payments. The program I wrote was very simple. Basically it would subtract the extra amount from principle, Take the new principle amount and multiply the interest rate/12 to calculate out the new monthly interest amount. Subtract the interest amount from the Standard payment to determine what the new months principle payment and repeat. Very easy.

My spread sheet followed to the penny what the bank showed as principle. I could pay down any extra amount through the month/year, and was accurate.

I also stated to the bank on the payment stub, the extra money to be applied to principle. Didn't want any confusion as to my intentions.

 

[mickeyd]

On my mortgage repayment project on my 15 years fixed mtg, I rounded my payments up to the next hundred dollars (I paid my tax/insurance directly) for the first 2-3 years. I then added an additional $100/month for 2-3 years. I then realized that I was almost 1/2 way through my amortization schedule and the tax deductibility of my payments was getting lower each month. At the point that I knew that taking the standard deduction was better than itemizing my junk, I used savings to pay it off.

I continued to make payments each month after that, but all payments were to me.

 

[WanderALot]

I pay our mortgage online and there is an "Extra Principal" field which I fill in. I always fill it in with the same amount and the amortization schedule always reflects the extra amount as going towards the next month's principal.

Just to be sure, I check the numbers with a mortgage calculator (by HSH Associates if anyone is interested) and the numbers match to the penny.

As long as the extra payment is made towards the principal as others have said, I think you're OK.

 

[almost there]

Bi monthly.
I paid my home off about 10 yrs ago using an automated
Bi-monthly deduction through my loan Co. out of my pay check.
That way, it just happens. You don't have to think about it.
It worked for me........

 

[beowulf]

Both Pentagon and Navy FCUs allow you to do all this on line. Any amount over your normal payment is automatically applied to principal. And you can make extra principal payments anytime you want to. These two, and I believe most, credit unions have no early payoff penalties and no fees other than the one to modify your deed to say it's paid off. That goes to the county (in VA) and not to the CU.

I haven't made paper payments in years - all direct transfers among accounts. In fact, with free on-line bill paying, my number of checks mailed each month has dropped to only a few (mainly small, single person service businesses who like to get a personal check each month).

With a combination of bi-weekly payments and occasional extra principal payments, we expect a 15 year mortgage to be paid in about 10 years or less.

 

[HFWR]

I can make extra payments any time; however, the first of the month is the best time, because all the extra goes toward principle. If I pay later in the month, the interest since the first of the month will be deducted. Of course, they'll be slightly less interest owed on the next payment, so somewhat of a wash...