Mortgage prepayment question

[venkman]

Mortgages usually work the way everyone is describing here, but my car loan doesn't. My loan is about $400/month (5 years), but I've been paying $1,000/month since I got it about a year ago. My last statement said my next payment isn't due until January of 2013.

Then you are getting screwed as it sounds like your bank is applying your over payments to future payments instead of reducing the principle and saving you money on the interest.

 

[geecee]

Seriously dude... talk to your lender, not us. (That and each state has different laws regarding prepayment as well)

This is the best advice. How your payments are handled will really depend on how your loan is serviced. Some apply extra payment to principal, some to future payments, though I'd expect with a coupon book, and mailing in a coupons for each month in advance, it will just push your next payment date back and give you no interest relief. As some have warned, check with your lender to make sure there are no prepayment penalties on your loan, if you choose to apply to principal. While most regular fixed rate 30 yr loans don't have them, many of the more exotic adjustable rate ones do. Also, these penalties usually only apply earlier on in the term of the loan, so be especially vigilant if you have a newer loan.

Prepaying principal makes sense if you want to pay less interest long term. Just to give you a quick example, a $200K 30yr fixed rate loan at 4.75% would have a monthly payment of a little over $1040. If you were to apply $300 extra every month to principal, the term of your loan would go down from 360 months (30 yrs) to 225 months (less than 20 yrs) and your total interest paid would go from ~$175600 to ~$102600. Of course, none of this takes into account time value, but with interest rates as low as they are and the stock market tanking (buying opportunity? ), prepaying your mortgage is not a bad way to go.

EDIT: That monthly payment is just principal and interest, and doesn't include escrow or insurance.

 

[EagleKeeper]

Whenever I paid my mortgage, my bank would send me the next statement. I didn't catch on right away and now I'm 2 months ahead on payments. I get a statement and the next due date is Nov. So I guess it'll depend on your lender.

this ^^^

I got burned last year. Sent in 2 payments at end of Nov for Dec and Jan.

Jan was now in my mind, paid early. I kept making normal payments anyhow; figuring that I was a month ahead, in case times got tight and between contracts.

Come end of April - no work and did not send in payment.
Get a notice from bank in mid May - late payment & fees; called them up.
Found out that they had credited extra payment that was made in Nov against the principal, not as stated on the epayment stub as intended for Jan.
Maybe if I had sent in two separate payments, it might have triggered a human intervention...

I was able to get them to reverse the no payment indicator and late fees.

Moral of the story.
If you are going to do something out of the normal flow; make sure that the lender understands what you are expecting to happen; that they fulfill your request and your get documentation of such.

 

[dullard]

Like others have said, the vast majority of lenders will count it as one large payment now (which will reduce prinicpal and save you hundreds/thousands of dollars in interest). But, you'll still owe money each and every month. You'd still have to pay the full amount on Feb, Mar, Apr, etc. It is just that your loan would end far, far sooner after that one large payment in Jan.

The bank promissed their investors money each month. They aren't going to hire a person simply to set up an account for you, store your overpayments in that account, pay monthly to the investors out of that account, and then close the account when you start paying again. That is just silly on the bank's part when you can easilly do it yourself.

If any bank did it differently, that would be a very rare bank. You'd have to explicitly tell them that the money is going to future interest and not to principal. Meaning that you don't save any money by paying early (your principal was unaffected by this move).

 

[Bignate603]

You cannot skip payments by paying extra. You must make a payment every month. When you pay extra, it does reduce the percentage of your next payment that goes to interest, so it does save you money, and you will pay off your mortgage sooner.

Kranky, my bill pay once got screwed up and paid my mortgage twice in one month. When I called to sort it out they had applied that payment to the following month. I'm sure the OP's mortgage holder has some way to prepay for people that will be doing things like traveling that will make it hard to pay on time each month. Most banks would be more than happy to let the money sit in their account rather than yours.

He'll have to contact the mortgage holder though to figure out how to do it, he may need to do something to make it clear what the extra payments are for. I'm not sure if it will do anything to lower the amount he'll pay in interest though, I don't think prepaying on mine has any real effect.

 

[dullard]

I'm sure the OP's mortgage holder has some way to prepay for people that will be doing things like traveling that will make it hard to pay on time each month.

There are two easy methods for people who have a hard time paying each month. (1) Go to your mortgage bank and set up an automatic payment plan. (2) Go to your checking account bank and set up an automatic bill pay plan. Most banks will do either. With #1, you get more flexibility since you can easilly tell that bank how much above the minimum payment should go to principal, escrow, or to future interest.

 

[Thump553]

Mortgages usually work the way everyone is describing here, but my car loan doesn't. My loan is about $400/month (5 years), but I've been paying $1,000/month since I got it about a year ago. My last statement said my next payment isn't due until January of 2013.

Odds are your car loan figures prepayments on something known quaintly as "the Rule of 78s" (short explanation-the lender f*cks you over if you prepay).

Most people are right in saying talk to the lender, but remember the terms of the Mortgage Note control and it is quite possible that the lender will misinterpret it. Read the Note, and if there is any gray area at all, call the lender and explain what you are going to do and follow it up in writing.

 

[EagleKeeper]

There are two easy methods for people who have a hard time paying each month. (1) Go to your mortgage bank and set up an automatic payment plan. (2) Go to your checking account bank and set up an automatic bill pay plan. Most banks will do either. With #1, you get more flexibility since you can easilly tell that bank how much above the minimum payment should go to principal, escrow, or to future interest.

Mine just takes anything above the payment due and attaches it to the principal reduction.:thumbsup: Unless, I screw up as stated previously :wub:

 

[kranky]

Odds are your car loan figures prepayments on something known quaintly as "the Rule of 78s" (short explanation-the lender f*cks you over if you prepay).

My understanding is that the Rule of 78s style (aka prepaid interest) loans are rare these days - other than at some subprime lenders ("buy here, pay here", for example). But it's important to know before signing the papers because you are correct, it's a very bad loan for the consumer.

Buying a car at a subprime lender has got to be the worst possible experience for a consumer. You get screwed on price, you get screwed on the interest rate, you get screwed on the loan structure, you're probably limited to cars that aren't in great condition, and if you miss a payment - instant repo and hundreds of extra fees tacked on to the loan. I read one story where a buyer found the repo guy in his driveway the day after the payment was due. Ain't no grace period!

 

[TheNinja]

That's not what I'm saying. Let me rephrase the question. I'm going old school here.

Say I have a mortgage payment book, with 360 payment slips in them. Each one marked for each month of my mortgage. I take 12 of them, write 12 checks, put them in 12 envelopes and mail them in all on Jan 1. My next payment is not now due for another year. Will this save me any interest as opposed to just making the payments on time?

I would say no then. Basically you are just giving them post dated checks that they should not cash until the next month. So they are pretty much just holding your money while you gain 0 interest on it.

Of course as others have mentioned your loan might be different but I'd say 1 of 2 things.

1. They apply all the extra payment to your princple
2. They cash 1 check per month just as if you were sending them 1 per month and you get 0 benefit from it