If i pay extra for my mortgage payment, will that extra go to my principle?
by Mortgage Rates on Wednesday, November 17th, 2010 | 9 Comments
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Yes, the extra $200 will go toward principle and it will mean less interest charges each month, which means each month more of your minimum payment amount is principle instead of interest. Extra payments compound quickly and you could probably take 10 years or so off your loan by paying an extra $200 per month.
Statement number 1 is false.
Statement number 2 is true. Some loans have a prepayment penalty that charges you extra fees if you pay the loan off early, but unless you have these fees the extra payment goes toward principle.
Both answers are wrong.
On your payment coupon, you must indicate where you want the extra funds to be applied. You can apply it to principle, interest or even escrow.
Whenever you make an extra payment, you need to specify that is is an extra payment of PRINCIPAL, otherwise it might
go to escrow, early payment for next month, etc. It’s on the coupons, and you fill in the line or check off a box.
Paying extra principal in first 5-10 years of your loan can have huge impact over life of your loan, because almost all of your payment is going to interest otherwise. It will reduce total dollar amount you pay over time and it will reduce the length of time you pay. It’s a wonderful thing to do whether it’s $200 a month or a lump sum of $1000 from Christmas bonus or even smaller increments. As long as it is accompanied by coupon, it doesn’t have to be by separate check, but you need something stating that it is extra PRINCIPAL.
Some loans have prepayment penalties, not many now existing, but if yours does, there are limitations on prepayments or penalties for prepayment, usually for a set time period. Read your loan docs carefully, and ask. You can make extra payments without talking to a loan officer, as long as there are no prepayment penalties.
look interest is the time value of money-how long you use it. So yes the extra should be sent in a separate check and the memo should be marked to principal to make things correct. You will pay off sooner and yes the interest earned by the lender will be less and you will be gaining equity faster.
I am a mortgage banker in TN& KY
You need to direct the lender to apply it to the principal. Otherwise, they might apply it to the next month’s due payment.
Normally, a regular fixed rate mortgage charges interest on the unpaid balance, and any extra payment goes towards the principal, taxes, insurance, etc. If you’re late, there will be late fee charges, too. The time to ask about all of this is when you apply for the mortgage, if possible. At any rate, ask early in the process. If you apply in person, ask then. If you apply online, do it in writing with the application. But since you’ll be spending a ton of money on this, be sure to ask, and be sure to keep asking until you fully understand the process, and you know how to make extra payments.
If there is any doubt about it, I would include a letter with each payment, asking that the additional money be used to pay down the principal balance.
And you didn’t ask, but be sure to avoid an adjustable rate mortgage (ARM loan) like the plague, mkay? You’ll be happy you did.
2 is fairly correct unless you have an FHA loan then it works a little different. If that’s the case let me know and I will post how that works.
Dominique Ressurreicao
Co-Branch Manager
American Pacific Mortgage
Great question. Some payment books actually show your min. payment due and a additional principle payment line some only show the min. payment due, but have a note somewhere on the statement or book that states that any additional payment amount will go to interest or principle. It sort of depends upon which bank you go through. One way to know for sure is to write two checks. 1st check is for the min. payment. 2nd check write Principle only on the checks note line and make a Principle only coupon on your computer. Put your information on it (Name, address, phone, account number, amount, ect.) and fill it out just like a payment book. This will guarantee that it will go only to the principle. Short answer is: You need to check with your bank and check your statements to see what type of payment system that they run.
Ask your loan officer for a fixed rate mortgage. The loan officer will give you a truth-in-lending statement that will show the cost of your loan over a 30 year period if you are applying for a 30 year loan. (They will show you the cost of a 15 year mortgage if you are applying for that.)
Ask them if there are any pre-payment penalties for your loan. The answer you’re looking for is “no”.
Just because the lender shows you the cost of a loan over a 30 year period doesn’t mean you have to make it last 30 years. So, when you send in extra money to be applied to “principal only”, you will be cutting down your balance owed faster than the 30 years that was alloted to you. Let me give you an example: If you bought a home for $100,000 and you financed it for 30 years, you might be shown a truth in lending statement that would have you paying back a total of $280,000. That’s how much interest would be tacked on to your cost of the house. That’s a lot of money….but that’s a lot of years too!!! So now lets say a week after you close your home loan you win the lottery. So now you want to pay your home off. What will the pay off be? It will be the $100,000 (or approximately). So the sooner you pay off principal balance, the sooner you save all that interest!
But when you start making your home loan payments you may not get a coupon so that you can designate where you want your extra payment to be applied. If you don’t have a coupon you will need to write an extra check to go with the regular payment. In the memo section of your check write “principal only” for account # blah blah blah. When you make extra principal payments and you turn a 30 year loan into a 15 year loan….you just avoided paying 15 years of interest!