San Diego Housing Bubble News and Analysis

You don't need a genius.

Every mortgage is unique. Let's take an example of a simple 30 year fixed rate mortgage amortized over 30 years. Your very first payment will be just about all interest and a tiny tiny bit of principal. Your second payment will be a tiny fraction less interest and a tiny fraction more principal.... and so on and so on.

Now instead of making 12 monthly payments, let's say you make biweekly payments. Well essentially you will be making an extra payment right? There are 26 biweekly pay periods in a year.

All you are really doing is paying down your principal in a structured manner. Indeed this is a good way to slowly chip away at your principal. Many will argue to not do that and instead invest that extra payment in an investment vehicle to get a better return then servicing your debt.

This post is not to debate that point but to simply illustrate an overly simplified answer to your question.

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Now getting to the specifics of your loan, your first 10 years are I/O so any payment you make above and beyond the interest will (I assume) go towards your principal. However you need to check with the lender to make sure that indeed will be the case.

You do have a problem you have to cope with. Right now your payment is interest only. At the end of the 10th year you will then need to make a full payment and you amortization will kick in. Your payment will go up. Yours is an example of many loans we talk about on Piggington.

Do you know what your new payment will be? You need to find out. HLS or Pasadena broker can answer better then I but I would bet that your payment will be based on a 30 year amortization. What is more troublesome is, what will your rate be? I assume your current rate is only for the first 10 years.

I don't want to bring you down, but instead of focussing on making an extra payment, (if you can afford to do so) you may want to think about refinancing into a safer vehicle. Alternately if you are going to not be in the home and sell within the next 10 years it makes no sense to prepay it down.

Note: You have an IO for the first 10 years, so the only way to lower your balance is to make an EXTRA payment to principal that is above and beyond your minimum interest payment. The best source of a direct answer to your particular arrangement is with the lender. If the CS rep that you first talk to can't help, then ask to speak to a supervisor.

Basically, it depends on when/how your mortgage calculates your interest on the principal. In the best case, your loan is re-amortized everytime you make a payment, meaning that the principal from which your interest is calculated is lower each time because of the previous payment that you made. But, this is generally only true of principal and interest payments.

In most cases, the loan is re-amortized only once a year, so you can lower your balance by simply making ONE extra payment at your anniversary date. The best thing to do is to call your lender and ask this directly. You could even request a payment option that lets you pay the payment in 2 monthly installments or on a bi-weekly basis.

This has been covered before here.

Bi-weekly means your making 26 payments (there's 52 weeks per year), which isn't the same thing as bi-monthly (which means there 24 payments).

Hence, your "accelerated" mortage pay off from a bi-weekly plan would be no different than if you just made 1 extra monthly payment toward your principle each year...except that companies that administer the bi-weekly plan usually charge a "service fee" to do this.

Save yourself some money. If you have an extra $3000 around each year, just apply it directly to your principle. There's no magic going on here.

selfportrait

----- Sour grapes for everyone!

I wouldn't pay for the program to make bi-weekly mortgage payments. Just make extra payments IF you understand what you are doing and it fits your personal situation AND you can afford it.

You need to look at your TRUTH IN LENDING statement, to see what your payments will be and when they change. They should be clearly indicated.

From your scenario above, I'm guessing that you have a 40YR rate with a balloon payment in 30 years.

Your payment includes impounds. Your payment will be $3018 for the first 10 years, then it goes up to $3460 for the next 30 years (Yrs 11-40)
OR
you have a ballon payment of $260,000 due after 30 years.

Sounds like you need help just understanding what you have now, without worrying about bi-weekly payments.

If you have any other consumer debt at non deductible interest rates, it would be foolish to accelerate your mortgage payments.

If you make payments of $3500 from now on, you will pay it off in 30 years instead of 40, saving yourself 10 years worth of payments or over $300,000 in interest.

Your "financial planner" has the advantage of knowing your overall financial situation. Did you FP advise you to get into this loan ?? Are you paying him to tell you to figure out what's best for you ? WTF ?
I do this stuff for people for free.

It isn't possible to "figure this out" with any mortgage calculator that I know of because they don't allow for paying principal on an I/O loan.

DH,
Normal Mortgage loans are ALWAYS interest first, with balance to principal, figured monthly.
I've NEVER heard of a loan that re-ams only ONCE a year.
That's insane.

HELOCS are usually figured on daily balances.

The "best source of a direct answer" is rarely the lender.
They often don't know their azz from their elbow, and only confuse people with incorrect information.
(Even calling the IRS helpline results in wrong tax info)

Talk to someone who breathes this stuff, and you'll get answers.

FLU

24 payments a year is called semi monthly.

The most important thing to do when considering doing a different payment schedule, is look at the loan documents. There may be a prepayment penalty or fee for pre-paying. The penalty may only last for an initial few years. The terms of the mortgage may be explicit as to when you pay, and you may not be able to alter the terms without additional fees.

If you can't alter the payment terms to allow accelerated paydown of the mortgage, place the difference in a separate account rolling them over into laddered CDs. If you feel more brave, try investing some of the money in mutual funds or stocks (do your own research on which to invest in, don't trust the suggestions by most of the 'pros'.)

You may want to check your mortgage. Something is fishy on your payment. You are either paying some serious points or something. A fixed 6.35% I/O on $475,000 should only have a monthly payment of about $2513.54 until it goes amortizing at the end of the 10 year period.

rate / 12 * 475,000 = 2513.54

rate = rate_pct/100 = 6.35/100

UCO,
Assuming that the OP knows their rate, they have an impound account of $505, which is what I already factored into my comment above. It's not fishy at all...
and you don't pay "points" in a monthly payment.

Most loans that have a prepayment penalty allow for paying up to 20% of principal per year without any penalty, so there is never a problem paying an extra payment here or there.

Chevy Chase was selling loans in 2005 that re-am'd only ONCE a year. The teaser rate was 1% over CODI. If you wanted the option of a re-am'ing more often (like every month) you had to pick the teaser rate of 2% over CODI. It was in the fine print underneath the fine print. And yes, it was insanity.

The lender is obligated by law to disclose every aspect of the loan to the borrower - including the re-am period and exact amount of each payment that is credited to interest and principal over the life of the loan. In fact, the escrow can't close until borrower acknowledges receipt of the Truth in lending disclosure.

OP's questions are straight-forward enough for a reliable answer from the lender. (I hope.)

Thanks for the info everyone. I like the fact that this site, while sometimes a bit chippy in the bearish direction really tries to help people out when they ask.
I found out that with the first 10 years interest only, I need to make extra principal payments to bring down the balance. Thus, the best call would be to invest the extra, and then begin the new schedule after 10 years assuming I am still in the same loan. (unlikely).Plus the 3018 figure included embedded taxes in case you were wondering why the math was off.
P.S My loan is with BofA. I really like the online tools they have, plus all my banking is now free, which is saving me about $240 per year in Wells Fargo charges.

DH,
I think that you are referring to an annual (or monthly) payment recast, not the crediting of principal.

I still don't believe that there is a lender on the planet that doesn't credit extra principal monthly...

NO loan closes anywhere in the country without a signed TIL.. and with an ARM it isn't possible to predict the exact amount of each payment over the life of the loan.

I now know that you have read a lot of bad information, and are only repeating what you think is true.

@HLS

Assuming that the OP knows their rate, they have an impound account of $505, which is what I already factored into my comment above. It's not fishy at all...
and you don't pay "points" in a monthly payment.

I was assuming the guy was talking about only the P/I (actually I in this case) portion of the costs, not the impound account for property taxes/insurance. Considering California at 1%, it may be a bit short for combined property taxes/insurance.. PMI too??

As for points, I was referring to amount added in for financing. The advertised/listed rate might have been 6.35%, but depending upon how financed.. there may have been points added. Too many people don't go through their own loan documents and actually read them.

Note to the gallery on impound accounts:
http://www.escrowhelp.com/articles/19990...

Most loans that have a prepayment penalty allow for paying up to 20% of principal per year without any penalty, so there is never a problem paying an extra payment here or there.
I have seen more than one that has a severe prepayment penalty on any percentage. One of these was a Countrywide origination... In fact, on that one, the period for prepayment penalty was something like 7 years.

Hello, 92024, there is an alternate worldview...don't pay ahead and don't refinance, just keep going with your original mortgage. If you find one day that the value of your house has declined substantially, in California you can just walk away. It'll bomb your FICO but if you buy another house first, it may not matter to you.

I make no claims for the effect on your karma.

My sister and hubbie got out of SD just before the price declines of the early 90's knocked their house value down about 30%. As of a couple years ago, it zillowed for 500.

OTOH I built a house in a reasonable suburb of Indianapolis (Lawrence North area) in 1986, for 96k. It's now worth about 130k. That's 1.4% a year appreciation for 22 years. Such is life.

When in the hell did they start doing 40 year mortgages?

WTF. Here is a staggering bit of info:

30 year mortgage total interest is $550,000
40 year mortgage total interest is $779,000

A delta of around $230,000. Just to save $234/month in payments.

WOW.

I guess you don't want to hear about 50 year mortgages then either.

SD Realtor

radelow

Let's keep this in perspective The formula would have a time discount on the payments for the addiontal 10 year with respect to inflation and the savings would have a compund effect with respect to return. To throw out a figure like 230K of added interest is slightly misleading.

*sigh* HLS, I know you are the resident mortgage guru on this forum, but please don't condescend. You're not the only one who knows the exact difference between a payment recast and principal reamortization.

You said, "don't believe that there is a lender on the planet that doesn't credit extra principal monthly..." And you are right. In the CC example I gave earlier, the disclosure is clear. Any payments to principal are credited each time the payment is made. However, the principal amount from which the interest is determined is calculated on the loan's principal balance on annual anniversary date of the loan. 

I point this out because things like this is what makes these loans suck.  I happen to have found this feature in a Chevy Chase loan I am helping a distressed homeowner modify.  Believe me, I have learned more about mortgage loan details in the past 6 months than I care to know about for the rest of my life.  It's the bad information that no one tells you about that is the danger these days.