Q for financial guys, making additional mortgage payments?

[scottmandue]

Okay, we signed up for a program with Citibank for making a mortgage payment every two weeks.
Sounds like a great idea... pay off the mortgage faster... pay less interest... blah, blah, blah.
Downside is those months where we pay three mortgage payments, long story short that surprised us one month, our account over drafted, bad things happened.
I said "screw this lets go back to once a month."
She said "no, this is important to me to pay off the mortgage faster."
My theory is we can make extra payments voluntarily and still pay off the mortgage ahead of time without the bank scheduling it for us and us running the risk of being caught without sufficient funds.

What think ye?

[lane912]

yes-

[RANDY P]

you can do the same thing making ONE extra payment a year. Less paperwork hassle.

choose ONE month and simply double the payment. Or, just set your automatic bill pay to pay every two weeks.

You do not NEED to pay the lender for this service. There's nothing magical about it.

[motion]

Yes, Just login online and pay any amount you want any time you want. Its pretty easy these days.

[Brando]

Agree with above - go with standard 1x per month and make extra payments as necessary. Just ensure that your payment is going towards the principal and not the interest. Banks in general are more than happy to apply your payments to the interest first automatically.

[Gogar]

You can also set up your Auto-pay to be a set amount OVER your required payment. Even just a few hundred bucks a month will knock it down fast!

[VincentVega]

Yes, Just login online and pay any amount you want any time you want. Its pretty easy these days.

This. Should be free and you control when you pay more. The months things are tight I dont, when there is extra it goes to the mortgage. Dont pay for this 'service'.

[masraum]

You should be able to. When we were paying our mortgage, we could check a box to pay extra and then check another box to apply the extra to principle only.

Yu should be able to pay whatever you want whenever you want as long as you are covering the minimum by the due date.

[chicago_82sc]

Originally Posted by Gogar

You can also set up your Auto-pay to be a set amount OVER your required payment. Even just a few hundred bucks a month will knock it down fast!

+1

My monthly auto payment includes an additional principal payment; basically one additional payment spread over the year. Really knocks down the effective life of the mortgage.

[Z-man]

For reference: one extra payment a year on a 30 year loan drops down the term of the mortgage to 22 years.

If you are able to double-up on the payments now, then assuming you have a 30-year loan, why not just refinance to a 15 year mortgage? They way, you make one (larger) payment a month, have a lower interest rate, and can pay off your mortgage sooner.

If you are borrowing 200k, there here's a comparison between a 15 year loan at 3.5% vs. a 30 year loan at 4.5%:

15 Year
Loan amount $200,000.00
Interest rate 3.500
Term of loan - years 15

Monthly interest rate 0.003
Term of lean - months 180
Est. montly mortgage $1,429.77

Total amount $257,357.71
Total interest $57,357.71

30 year loan
Loan amount $200,000.00
Interest rate 4.500
Term of loan - years 30

Monthly interest rate 0.004
Term of lean - months 360
Est. montly mortgage $1,013.37

Total amount $364,813.42
Total interest $164,813.42

There is a huge difference in the total cost of the loan when comparing a 30 year vs. a 15 year. you can easily create a mortgage calculator in Excel that can show you the numbers. (Or PM me and I can send you my spreadsheet).

If you can already afford a 15 year mortgage, why not just refinance to a more attractive rate?

-Z

[Noah930]

+1 for the Gogar method. 12 automatic payments per year. Again, just make sure the bank knows to apply the excess payment to the principle, not the interest. Banks are sneaky like that.

[1990C4S]

If you have the discipline to make an extra payment then you're fine to switch back to monthly. Most people don't ever make the extra payments.

Why not get overdraft protection for this?

[Christien]

If your contract stipulates monthly interest payments and you pay that, anything above and beyond that goes to principal. How can a bank take an extra payment and apply it to interest? How would that not be illegal?

[Lapkritis]

IIRC, rule of thumb is 1 extra payment per year will pay a 30yr mortgage back in 22yrs.

[VincentVega]

If you are able to double-up on the payments now, then assuming you have a 30-year loan, why not just refinance to a 15 year mortgage?

I like the flexibility to overpay when I want. When nothing else is more attractive to put the $$ on the mortgage.

[Noah930]

Originally Posted by Christien

If your contract stipulates monthly interest payments and you pay that, anything above and beyond that goes to principal. How can a bank take an extra payment and apply it to interest? How would that not be illegal?

I have had that happen twice, so far. Each time I caught it when I looked at the following month's statement. A phone call/email cleared up the problem, but had I not called I am fairly sure the lending company would not have corrected their "error."

[widebody911]

I pay a little extra each month, and it gets applied to principal automatically, as there are supposed to do. Previous banks that held my mortgage were not so benevolent, ie Washington Mutual (may you rot in hell).

[Craig T]

Originally Posted by Noah930

I have had that happen twice, so far. Each time I caught it when I looked at the following month's statement. A phone call/email cleared up the problem, but had I not called I am fairly sure the lending company would not have corrected their "error."

Yep. Illegal or not, his happened to me too. I made a double Payment in January for the payment due Fed 1. When the February bill came that should have been due Mar 1, it said "Payment Due April 1. They simply applied the extra money to interest and principal as the next month's payment. It took several calls to clear it up.

[Rinty]

Originally Posted by scottmandue

What think ye?

I agree with you.

But keep a good sized rainy day fund in your savings account, for unforeseeable contingencies.

On a side note, a bounced payment can have serious ramifications for your credit rating.

[foxpaws]

If your mortgage is at the low end of the interest scale - why? At this point it is cheap money - my interest rate is less than 3% - even compounded I will make far more in investing in a decent mutual fund (most mutual funds return in the 8% to 10% range over the course of 10+ years) than I would save on interest by making an extra payment each year. I know that at a mortgage rate of about 6.5% you cut 6 years of your mortgage if you add a payment each year - that declines as the interest rate gets smaller.

Original mortgage amount: $200,000
Interest rate: 6.5 percent
Term: 30 years
Monthly payment: $1264
Total interest paid on your loan: $255,088.98
How much you will really pay in full at the end of your term: $455,088.98

Original mortgage amount: $200,000
Interest rate: 6.5 percent
Term: 30 years
Monthly payment: $1264
Additional payment per year of: $1264
Total interest paid: $199,098.92
Total cost of your loan when paid in full: $399,098.92
Pay off date of the loan is reduced by: 6 years

You have saved $55990

Say, instead, you put $105 a month into a mutual fund (yearly investment $1260) - in 24 years you would have $91,000 at an 8% yearly gain - you could pay off your loan and have almost $35,000 left over. Or even if you go more conservative - say 6% return on your money (a decent deferred annuity will give you that) - at the end of 24 years you would have $67,320, again, pay off your note and pocket the $12,000. What if that mutual fund returns near the high side - say 9.5% - at the end of 24 years - $115,000, you get to pocket almost $59,000.

You should do lots of things, check with your tax lawyer (you might want that full interest payment on your home for a tax write off for now because it keeps you in a lower tax bracket - and toss that extra payment into a tax-free investment or your 401K or IRA) but, often there are many better options than paying off a low interest mortgage early. Also - if you are carrying any other debt that has a higher interest rate than your mortgage - pay that off first - the interest on those loans is usually just money down the drain, and often isn't even a tax write off.

And remember - this is for a 6.25% mortgage loan - if your interest rate is lower - the amount you will be ahead if you invest instead of pay early will be more.