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If you pay OVER you monthly mortgage payment.....what happens?

N

Nutdotnet

Diamond Member
I undetstand how it works with Credit Cards and other revolving accounts, but I don't know if it is the same with a mortgage.

Say (these numbers are far from accurate) you have a $100,000 mortgage for 15 years @ 5%. So your payment would be $770.79 a month. Now, say instead of paying the $770.79 you pay $1,000 a month resulting in an overpayment of $229.21.

Does this amount get automatically taken off the principle?
Your next monthly payment would still be $770.70 correct?
In essence, you would be paying off the loan quicker and accuring less interest....right?

 
you have to specify that you want the extra amount to go to principal...and it would be worth your while to do that...

your next payment stays the same, you are correct....
 
And now we can cover the reasons why you DON'T want to pay any extra principal.

🙂

A slight bubble in real estate might be one.

😉
 
Originally posted by: NeoV
you have to specify that you want the extra amount to go to principal...and it would be worth your while to do that...

your next payment stays the same, you are correct....
Click to expand...
While it is recommended that you instruct the servicer to have the extra amount go to principal, it is no longer strictly necessary, as a Federal law passed in the late '90s forbids mortgage servicers from putting the extra amount against the borrower's escrow impound account or towards future interest (edit: unless the borrower specifically instructs the lender to do so).
Provided the account is in good standing, that leaves only the principal.
 
Yeah, I'll definitely talk to the mortgage company, I was just curious. I'm not in the market right now, but will be soon. Plus I was doing some excel interest payment stuff. Anyone know how to figure this stuff out on MS Excel?

I know how to calculate the interest payments and the principle payments when you make the minimum monthly payment...but if you pay over that montly payment, it results in a lower principle, which results in a lower amount they can charge you interest on.
 
Make sure you specify the extra money goes toward principal. Otherwise the lender may just toss it in your escrow account.

Mainstream financial advisors say don't do this, that your home mortgage is the cheapest money you can borrow (especially considering the deductibility of home mortgage interest). Invest the extra elsewhere, they say. I disagree-to me the psychic benefit of owning my home free and clear earlier (instead of falling into the constant refinancing cycle most people do these days) is well worth it. Besides, with my track record in investments, I might as well burn the extra money as put it in the stock market.


PS-its principal, not principle. They mean completely different things.
 
Originally posted by: Nutdotnet
Yeah, I'll definitely talk to the mortgage company, I was just curious. I'm not in the market right now, but will be soon. Plus I was doing some excel interest payment stuff. Anyone know how to figure this stuff out on MS Excel?

I know how to calculate the interest payments and the principle payments when you make the minimum monthly payment...but if you pay over that montly payment, it results in a lower principle, which results in a lower amount they can charge you interest on.
Click to expand...

I prefer to use a loan calculator which includes ammortization and "how much would I save if I pay an extra $111" scenario's.

$100,000.00 @ 5% for 15 years

Add $230/mo to your payment ($1,000 i/o $770) saves you 5 years!!!
 
Never pay minimum payments on loans. Even if it is just a small amount (for instance, rounding $780 up to $800), you will come out ahead. As an example, every dollar I pay extra on my mortgage saves me nearly two dollars in interest on the loan.
 
Originally posted by: Bryophyte
Never pay minimum payments on loans. Even if it is just a small amount (for instance, rounding $780 up to $800), you will come out ahead. As an example, every dollar I pay extra on my mortgage saves me nearly two dollars in interest on the loan.
Click to expand...

This is simply not true. There is no absolute. Simply two schools of thought.

1) pay off mortgage early
2) always finance for 30 years and invest cash saved and enjoy the interest deductions on your taxes.

In many ways paying over the minimum will cost you cash.

The decision on which approach to take depends on a whole buncha factors. I'm no CPA but I deduct interest like it is going out of style...I have to.
 
Stupid question-

Where would be a good site to learn more about the requirements in making your interest tax deductable?

Thanks, I thought it was principle, not principal!
 
One easy way to see the impact of paying ahead on your mortgage:

Use a website that calculates amortization tables and plug in the numbers for your mortgage. It will show you how much of each payment goes to principal and how much goes to interest.

Let's say the next month's principal is $50. If you pay an extra $50 this month, you will essentially skip ahead an entire payment.

If you pay ahead in amounts which don't exactly correspond to the amortization table (and that's perfectly OK), it makes it harder to keep track of where you are in the schedule. You can get close by looking at your most recent mortgage payment statement where it shows you the breakdown of principal/interest of your last payment. Using that, look for a line on the amortization table that is pretty close to the same breakdown. That will give you a good idea where you are.
 
Originally posted by: spidey07
Originally posted by: Bryophyte
Never pay minimum payments on loans. Even if it is just a small amount (for instance, rounding $780 up to $800), you will come out ahead. As an example, every dollar I pay extra on my mortgage saves me nearly two dollars in interest on the loan.
Click to expand...

This is simply not true. There is no absolute. Simply two schools of thought.

1) pay off mortgage early
2) always finance for 30 years and invest cash saved and enjoy the interest deductions on your taxes.

In many ways paying over the minimum will cost you cash.

The decision on which approach to take depends on a whole buncha factors. I'm no CPA but I deduct interest like it is going out of style...I have to.
Click to expand...

Deductions are great and all, but it's not like you get to deduct 100% of your interest directly from your taxes. I paid 18,000 bucks in mortgage interest last year. Great deduction, but I really don't think I would have owed 18000 extra in taxes, do you? Sure, invest the extra cash. Well, I will feel a lot safer when I own my place, not the bank.
 
Originally posted by: Bryophyte
Originally posted by: spidey07
Originally posted by: Bryophyte
Never pay minimum payments on loans. Even if it is just a small amount (for instance, rounding $780 up to $800), you will come out ahead. As an example, every dollar I pay extra on my mortgage saves me nearly two dollars in interest on the loan.
Click to expand...

This is simply not true. There is no absolute. Simply two schools of thought.

1) pay off mortgage early
2) always finance for 30 years and invest cash saved and enjoy the interest deductions on your taxes.

In many ways paying over the minimum will cost you cash.

The decision on which approach to take depends on a whole buncha factors. I'm no CPA but I deduct interest like it is going out of style...I have to.
Click to expand...

Deductions are great and all, but it's not like you get to deduct 100% of your interest directly from your taxes. I paid 18,000 bucks in mortgage interest last year. Great deduction, but I really don't think I would have owed 18000 extra in taxes, do you? Sure, invest the extra cash. Well, I will feel a lot safer when I own my place, not the bank.
Click to expand...


And that is your choice. You choose security over money. Its what financial planning is all about - making decisions that support ones goals.

I choose money and growing it. That is my goal. 🙂
 
If you can, pay your mortgage bi-weekly (break your monthly payment in half). This will also make a huge difference in paying of the mortgage early. The benefit is even greater than just paying extra when your payment is due. It shaves off several years on a 30 year mortgage.

Matt
 
Another thing you should check is if you do over pay, when is that applied to the principle. I have a friend who's bank applied it at the end of the year, even though he over paid every month. Didn't have the same benefits as he thought.
 
Originally posted by: Thump553
Make sure you specify the extra money goes toward principal. Otherwise the lender may just toss it in your escrow account.
Click to expand...

Wrong. Read Vic's post slightly above yours.
 
I didn't read all the replies, but check with the mortgage provider and see what their policy is. Someone was telling me about how they didn't credit the extra amount and they basically lost that money 🙁

You have to specify that you want the extra amount to go to principal
 
Originally posted by: AgaBooga
I didn't read all the replies, but check with the mortgage provider and see what their policy is. Someone was telling me about how they didn't credit the extra amount and they basically lost that money 🙁

You have to specify that you want the extra amount to go to principal
Click to expand...

Well, where would the actually money go if they didn't apply it to the principal? I mean, it has to go somewhere where it is benefiting the payee does it not?
 
Originally posted by: fenrir
If you can, pay your mortgage bi-weekly (break your monthly payment in half). This will also make a huge difference in paying of the mortgage early. The benefit is even greater than just paying extra when your payment is due. It shaves off several years on a 30 year mortgage.

Matt
Click to expand...

Thats how we pay ours.. bi-weekly. 🙂
 
Originally posted by: TwinkleToes77
Originally posted by: fenrir
If you can, pay your mortgage bi-weekly (break your monthly payment in half). This will also make a huge difference in paying of the mortgage early. The benefit is even greater than just paying extra when your payment is due. It shaves off several years on a 30 year mortgage.

Matt
Click to expand...

Thats how we pay ours.. bi-weekly. 🙂
Click to expand...

I was looking at that bi-weekly...is there any way to change an existing monthly mortgage to a bi-weekly?
 
Originally posted by: Nutdotnet
Originally posted by: AgaBooga
I didn't read all the replies, but check with the mortgage provider and see what their policy is. Someone was telling me about how they didn't credit the extra amount and they basically lost that money 🙁

You have to specify that you want the extra amount to go to principal
Click to expand...

Well, where would the actually money go if they didn't apply it to the principal? I mean, it has to go somewhere where it is benefiting the payee does it not?
Click to expand...

well it could have gone towards interest or the escrow account, but we know it goes towards principal.
 
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