prepaying on mortgage

[lockandkey]

I've been making additional payments to my mortgage to get it paid off as quickly as possible. with each payment my next due date gets further out into the future. I saw some information somewhere once about how this means you are prepaying intrest that would never accrue rather than having your entire additional payment go towards principle, but it wasnt explained very well. can anyone explain this to me and what i need to be doing?

[Petunia 100]

I've been making additional payments to my mortgage to get it paid off as quickly as possible. with each payment my next due date gets further out into the future. I saw some information somewhere once about how this means you are prepaying intrest that would never accrue rather than having your entire additional payment go towards principle, but it wasnt explained very well. can anyone explain this to me and what i need to be doing?

The best thing to do is call your mortgage servicer and ask them how they want additional principal payments to be made. Also, tell them that you had intended the extra monies already paid to be applied to principal. They can adjust it for you.

[lockandkey]

i appreciate the reply, and plan to do that, but im looking more for an explanation of the difference between the ways the payment can be applied and how it effects the total interest.

for what its worth there is no escrow in the payments.

[Petunia 100]

i appreciate the reply, and plan to do that, but im looking more for an explanation of the difference between the ways the payment can be applied and how it effects the total interest.

for what its worth there is no escrow in the payments.

Oh, gotcha.

Mortgage interest is calculated this way each month:

Principal Balance x Interest Rate / 12

So if your principal balance is 100k and your interest rate is 4%, the next month's interest will be:

100,000 x .04 / 12 = $333.34

Suppose you make an additional principal payment of $100, the next month's interest becomes:

99,900 x .04 / 12 = $333.00

In other words, you would save $.34 of interest the next month. That may not sound like much, but remember, you will continue to save interest on that same $100 every month from then on, until the mortgage is paid in full. And, you will save interest on the interest. (The following month, you will save interest on $100.34). Over time, it does add up.

If that $100 is instead applied towards some future payment, your principal balance is not reduced. Therefore, there is no interest savings. In the following month, you will pay the scheduled interest of $333.34.

[disneysteve]

If your payment date is changing, that means they haven't been applying the extra payments to principal but rather treating them as extra payments. With my mortgage, whether I pay with the paper statement or online, there is a line that specifically says "additional principal". Yours should have something similar. If it doesn't, you need to contact your lender and find out how to make extra prinicipal payments. Also ask if there is any way they can reallocate the extra you have already paid.

[corn18]

Oh, gotcha.

Mortgage interest is calculated this way each month:

Principal Balance x Interest Rate / 12

So if your principal balance is 100k and your interest rate is 4%, the next month's interest will be:

100,000 x .04 / 12 = $333.34

Suppose you make an additional principal payment of $100, the next month's interest becomes:

99,900 x .04 / 12 = $333.00

In other words, you would save $.34 of interest the next month. That may not sound like much, but remember, you will continue to save interest on that same $100 every month from then on, until the mortgage is paid in full. And, you will save interest on the interest. (The following month, you will save interest on $100.34). Over time, it does add up.

If that $100 is instead applied towards some future payment, your principal balance is not reduced. Therefore, there is no interest savings. In the following month, you will pay the scheduled interest of $333.34.

That is how simple interest is calculated and applied. I don't think a mortgage works that way. You pay mostly interest up front and mostly principal in the backend. I could be wrong.

[Petunia 100]

That is how simple interest is calculated and applied. I don't think a mortgage works that way. You pay mostly interest up front and mostly principal in the backend. I could be wrong.

A mortgage works exactly that way. Pull out any amortization schedule, or plug the above into the mortgage calculator on Bankrate.com and check it out for yourself.

[Wisedog]

I've been making additional payments to my mortgage to get it paid off as quickly as possible. with each payment my next due date gets further out into the future. I saw some information somewhere once about how this means you are prepaying intrest that would never accrue rather than having your entire additional payment go towards principle, but it wasnt explained very well. can anyone explain this to me and what i need to be doing?

When you make additional payments you a different check and write on it Apply To Principle Only