Extra payments in car v home loan – one changes next due date, the other doesn’t

[gzz]

When I had a car loan making an extra payment resulted in delaying when the next payment was due. So if I paid 12 monthly payments at once, I would not be required to make any further payments for a year.

That was very nice compared to extra payments on a mortgage, which still require the full normal payments each month.

Is there any type of 30 or 15 year mortgage that treats extra payments this way?

[plm]

Shouldn’t you just setup automatic payments each month? Doesn’t make sense to me to make extra payments early. You are paying interest to borrow the money after all.

I believe you can choose whether the payment goes toward principal or not.

[Coronita]

Actually, my 15 year on my primary and my 30 year on one rental all let me make payments ahead of time. I don’t need to make payments until March. But there’s a wrinkle to this. If you really have extra money, you are probably better off paying down your principal and making your regular payments on time. I am in this situation. In which I made early payment so i dont need to make payments to March, but I really wanted to pay off the remaining $55k loan amount in January.

I guess I could try to get the servicer to reverse my payments but probably not possible. So basically i made payments when my principal was higher, such that a greater portion of my payment went to interest. If I just paid down my principal at the time, I wouldn’t have made all that extra interest payments for January and February since I would have simply been done in January.

Almost debt free again…whohoo.

[Essbee]

Hmm, but if you pay now, and the extra goes toward principal, doesn’t a larger proportion of your January and February payments go toward interest instead of principal? (ie because the remaining principal is less) on the date that those bills are generated?

[Coronita]

[quote=Essbee]Hmm, but if you pay now, and the extra goes toward principal, doesn’t a larger proportion of your January and February payments go toward interest instead of principal? (ie because the remaining principal is less) on the date that those bills are generated?[/quote]

It’s the other way around. If your outstanding principal is less, interest computed is on a lower principal. Your monthly payment remains the same, but a a larger portion of it goes to principal instead of interest payments. If in doubt, just go use a decent amortization calculator.

[gzz]

I do have autopay, but that means I have to either (1) keep a bunch of money in a checking/savings account making 0.1% interest or (2) keep it somewhere with a higher yield but transfer it a bank account all the time.

I want to make a large payment now, reduce the amount of principle I am paying 3.75% on, and not have to worry about the mortgage in the slights for a year or three.

Now that I think about it, both my car loan and student loan worked this way.

As for principle/interest, if I paid an extra $20,000, it would be counted as an extra principle payment, and interest would accrue as normal on the lower balance. The new payment date would be based on when my growing loan balance, absent any further payment, would equal the balance if I had made regular minimum payments. A double payment would only delay the next payment by one month, but a 20x payment would cut the principle enough that the loan balance would take about 22 months to get back to the balance on the amortization schedule.

[gzz]

Flu, what bank? What type of loan?

“If you really have extra money, you are probably better off paying down your principal and making your regular payments on time.”

For me the issue is my income is bumpy and unpredictable. I have money now, I know I need to pay $50,000 in mortgage payments over the next year, might as well make a year’s worth of payments now.

Maybe I can pay even more down, maybe not, but at least that $50,000 reduces the balance I am paying 3.75% on rather than sitting in a 0.1% checking account with auto-bill.

[HLS]

Gzz..
If you made a year’s worth of payments now and didn’t have to make a payment for 12 months, you would still be paying the same amount of interest and not saving anything; you would just be paying it in advance.

Several options possible.

By paying $50K now, you will save about $1800 in interest over the next 12 months but still be obligated to make your same monthly payment which will pay down principal faster.
Are you comfortable with that ?
You could also pay down $25K now and save the $25K as a cushion.

If you are willing to risk that you *probably*
will not need the $50K in the next year, pay down your mortgage:

1) Call your servicer and ask them if you want to pay down a chunk of principal if they will recast your loan payment adjusted to the lower amount with the same payoff date. Sometimes possible.
Understand that they likely do not own your loan, they just collect payments. A mortgage backed security is expecting the monthly payment based on your original amount

2) If you have at least 25%+ equity, apply for a HELOC (Home Equity Line Of Credit) if you can qualify. There’s no cost and you get a checkbook with a line of credit that should be no more than Prime (now 3.50%) and you should only be charged daily interest if you need any money in a pinch.

3) Get a credit card OR check the ones that you have for access to cash at 0% for up to 21 months, with a 1%-3% upfront cost.
**This is cheap money. I have clients that have been creative in paying down mortgage balances this way, you need a good credit score**

There are ways to juggle debt with very limited risk. As long as you have access to cash somewhere
it’s not a bad idea.

Never wait until you really need the money to set these strategies in place.
You can often get access to money when you don’t need it but if one waits until they lose their job and then applies, it’s much less likely that you can get approved when you really need the money.

[Essbee]

[quote=flu][quote=Essbee]Hmm, but if you pay now, and the extra goes toward principal, doesn’t a larger proportion of your January and February payments go toward interest instead of principal? (ie because the remaining principal is less) on the date that those bills are generated?[/quote]

It’s the other way around. If your outstanding principal is less, interest computed is on a lower principal. Your monthly payment remains the same, but a a larger portion of it goes to principal instead of interest payments. If in doubt, just go use a decent amortization calculator.[/quote]

Argh, I did know that but I said it wrong! Thanks.

[Coronita]

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[Author]

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