Extra Payments to "just" Mortgage Principle

[Thrifty Angler]

Have a question about paying off a 30 year fixed ratemortgage early. Have already put 5 years in.

I'm not familiar with the legalities...although I do recall some many years back that there were penalties applied to the borrower if they paid off a mortgage early. Don't know what applies in this day and age...but

Want to know if a lump sum payment or extra payments are made to the mortgage company with instructions to specifically be applied directly to the principle only......would result in penalties?

And also, how would such extra payments affect future scheduled payments? .....would the future payments be reduced based on having a lower principle with which interest is then applied? And would the term still continue for the entire remaining payments due....up to the 30 year point from the original date of closing, or would one have the option of having months/years be shaved off instead?


Thanks Guys

[BubbaHoTep]

We refinanced at the end of 06, Thrifty. I think some of that may vary by lender, but I would think any "overpayment" would go toward the principal regardless. Our first mortgage (2 yr. fixed - 28 yr. ARM) had a "can't refinance during the first two years" deal on it, and it was hard to get a "final payoff amount" out of them when it came time to refinance. When we refinanced, the new company told us that any overpayment would go toward the principal, but if you agreed to a certain monthly payment (fixed, which we did), I would think you might have to refinance again to get the payment lowered. I'd think if your rate is variable, that your payment would be lower if the principal is lower, right???

That's a very good question, and I'm sure some folks will chime in with some good info on this one.

We bought the house in 04 and refinanced before a lot of this nonsense with the home loan situation, but I am getting refinance offers every day in the mail, and I might look at doing it again if the interest rate gets low enough. At this rate, we're going to be paying until we're in our 70s as it is! :)

Ah, ok, just saw where you added the "Fixed" part. :)

[basstardo]

It should be in your mortgage contract whether or not there is a penalty for early payoff. It's a specific section that should be mentioned. If you can't find it in your contract, just call the lender and ask. That would probably be easier anyway.

Also, if you plan to stay in the home for a long time or want to build equity faster, making the extra payments is a great idea. If you plan to move soon and you aren't worried about equity, don't bother. You could use that money somewhere else that would be better served.

Regarding terms of the loan, you're payment will never change, but the duration will if you pay it off early. Say the 30 years ends in 2025, and you've paid off enough extra to end it three years or so ahead, the loan would be paid in full in 2022. Make sense?

When paying the principle down, you should pay the extra when you pay your mortgage. That way the accumulate interest is paid off, and the rest (extra) is applied to the principle. I don't believe you can specify funds to go to principle only, as they will take the accrued interest off the top first no matter what.

[Thrifty Angler]

Paying extra thru out the term would then reduce the duration in months/years til payoff. That's sorta good.

Even with that effort.....they will still get every penny of interest as set in stone on the original date of closing??? That's what we want to avoid them being able to do. We were hoping to be able to shave off some of that interest by paying extra here and there. :(

5.45% fixed rate for 30 years is where it stands. It's manageable cause the original purchase price was under $100,000.

[hamlet]

The interest they put in your contract is part of fed law that requires them to let you know what you are in for *if you pay off as scheduled*.

You pay interest each month on the remaining principle you borrowed that month. So every extra you pay down on the principle reduces the overall total amount of interest you pay over the life of the loan. It does not reduce your monthly payment... that is set in the contract.

If you put in 10% extra each month you will simulate making a little more than one extra monthly payment per year. That extra payment will cut a 30 year mortgage down to a 22 year mortgage.

BTW if you pay in extra principle one month, many lenders make you check some box that says "this extra should be used to cut my principle". If you don't tell them to do it, many will simply take that extra and treat it as prepayment on the next month's payment... meaning it won't cut your principle. So just make sure you read the payment coupon carefully.

[lil red jeep]

I've heard that if you send in extra in a payment, and don't specify where you want it to go, the lender is not obligated to put it anywhere but to where they want it to go. On the other hand, if you send in two checks, both with acct. numbers, one for regular payment, and the other designated "principle only", it has to go to principle.

I'm looking at a refinance right now. Just had the appraisal done and waiting for the stimulus package to be signed in, and we're expecting a 30 yr fixed with no points to go below 4.5%. If you can swing it, and want to save some on your monthly pmt., p.m. me for the guys name and # I'm using. Because we're combining our first and a small second, we're saving right at $400/month in the refinance. Just in time!:)

[surfchunker]

the more you pay at the first of the loan the more it will reduce the interest and help you the most .... and yes alot of banks will add any extra to the next payment if not specified

[J_Lannon]

Why not just go with a 15 year. Your mortgage payment wont be that much higher than a 30 year to begin with.

[hamlet]

The only reason to do 15 year is that typically you get 1/2 pt lower interest rate. Other wise you can pay a 30 yr off at a 15 yr rate and still be able to make a lower payment in months when $$ are tight

[Thrifty Angler]

Payment started around $595 per month...that includes

regular insurance as well as flood insurance...with the elizabeth river within 8 car lengths of the house = maximum pay level for that flood zone level
+
property taxes put into escrow
+
the payment based on 5.45% of the principal

It's up due to a series of property re-assessments which has put it around 100% increase from the time of purchase

now equaling around $650 total monthly.
Very manageable. Refinancing isn't necessary.

Just looking at ways to reduce overall payback on the loan. One extra yearly payment/ or 10% extra per month is do-able. Having the option to take years of payments off will be fantastic.

Thanks guys.