Paying extra to your mortgage, why balance went down only by $544.75 when I paid $2,131.96?

[ninaprincess]

I borrowed 394K for 30 years with 4.25% rate, after one payment+pmi of $2,131.96, my balance is $393,457.18. And then I made one extra payment of $2,131.96 and my new balance is now $392,912.43. My question is, why I paid $2,131.96 extra and my balance went down by only $544.75 and not $2,131.96? My thought is that it should go down by $2,131.96 because this is basically paying the principle and not interest.

I am still about $40k away from ending PMI payments. So let say if I put in $40k into the loan right now, what is my new loan balance?

thanks

[carlsbadworker]

When making payments, you will need to specify whether it goes to extra principle or it is a pre-payment for next month. The default is the latter for most mortgage. But you can call them to make sure that $40K goes into principle when you make that extra payment.

[UCGal]

[quote=carlsbadworker]When making payments, you will need to specify whether it goes to extra principle or it is a pre-payment for next month. The default is the latter for most mortgage. But you can call them to make sure that $40K goes into principle when you make that extra payment.[/quote]
This!

I learned this the hard way and am now a payment ahead, when I wanted to be paying towards the principal.

Fortunately, I noticed it and made the adjustments. (I’ve been making extra principal payments pretty aggressively in the hopes of being 100% debt free soon.)

[ninaprincess]

I called Wells Fargo and they said they would help to make adjustments so that the payment goes to the principal. Since both my husband and I are working and have a lot of extra income right now, I hope to make extra payments into the principal and to own the house before we reach 50. I have seen many people over 50 lose their jobs and can’t afford to make house payments.

Some people advised us against this because we would lose the tax advantage but I think we are not discipline enough to not spend the money if it is sitting in the bank. I rather have my money in the house or 401k.

[quote=UCGal][quote=carlsbadworker]When making payments, you will need to specify whether it goes to extra principle or it is a pre-payment for next month. The default is the latter for most mortgage. But you can call them to make sure that $40K goes into principle when you make that extra payment.[/quote]
This!

I learned this the hard way and am now a payment ahead, when I wanted to be paying towards the principal.

Fortunately, I noticed it and made the adjustments. (I’ve been making extra principal payments pretty aggressively in the hopes of being 100% debt free soon.)[/quote]

[cvmom]

Ninaprincess, I think you are smart. I just went through a job scare (they laid me off, but hired me back within a couple of weeks) and the fact that we live in a small-but-paid-off house allowed me to sleep at night during that difficult period. I am nearing 50, and definitely feel that I am no longer as marketable as I once was.

Don’t buy into this culture’s mantra of over-leveraging to buy a bunch of stuff you don’t really need!!

[UCGal]

[quote=cvmom]Ninaprincess, I think you are smart. I just went through a job scare (they laid me off, but hired me back within a couple of weeks) and the fact that we live in a small-but-paid-off house allowed me to sleep at night during that difficult period. I am nearing 50, and definitely feel that I am no longer as marketable as I once was.

Don’t buy into this culture’s mantra of over-leveraging to buy a bunch of stuff you don’t really need!![/quote]
This!

Sure you lose the tax advantage. But you also aren’t paying interest… which is really improving your long term bottom line.

Middle aged workers (like me) are definitely more disposable in this current job climate. The mantra seems to be to lay off senior folks and hire fresh grads with no experience or outsource/offshore/inshore for lower cost. And the older you are – the harder it seems to get the next gig. The fact that my mortgage retirement is in site gives me comfort for the same reasons cvmom mentioned.

[carlsbadworker]

[quote=ninaprincess]Some people advised us against this because we would lose the tax advantage but I think we are not discipline enough to not spend the money if it is sitting in the bank. I rather have my money in the house or 401k.[/quote]

I don’t understand the tax advantage statement because you have to pay extra interest to get a partial tax return. But it is mathematically proven that having some kind of debt can increase your overall financial returns. However, the key is the debt level has to be “optimal” such that you can repay them safely. And any income is not passive is probably not very safe.

[ninaprincess]

Just found out that I can’t just pay down the principal and remove PMI. The minimum period is two years.

So I probably have to pay down the principal and refinance to remove it then. Is this correct?

[mike92104]

I was under the impression that you had a right to have PMI removed once you were at 78% LTV.

Am I wrong?

[waiting hawk]

I put down 15% and had a $98 PMI. My house was a trashed foreclosure bought low at 350k. 8 months after purchase I called sheldon and refinanced for a lower rate and got rid of my PMI as my appraisal came in at 515k. If you have the value just refi and be done.

For the “myth” that having a lower tax by paying interest on your home loan, why dont people call a broker and demand a higher interest rate on a home loan then so you can deduct more each year? Its a scam as I would rather give the IRS some money then a bank a ton of money. Its the same scam as being a dumbass in the bubble for having all that equity sitting in your house instead of yanking it out and installing granite or buying 10 more houses.

[scaredyclassic]

It’s not a myth, there is a tax advantage. People grossly overestimate the benefit but it’s not zero.

Im not sure paying down just the mortgage is best. Diversify. Save the money in other areas too.

[TemekuT]

Let’s all pay $3 interest so we can save $1 in taxes. That’s after adjusting for the benefit on the first portion of taxable income of $5,800 single and $11,600 married, available to all via the standard deduction. Then, be sure to adjust for AMT as Schedule A deductions are limited and personal and dependency exemptions are phased out as AGI increases. Okay, ready now? Let’s all rush out and acquire lots of “tax deductions” so we can all save money on our taxes.

[briansd1]

There is a tax advantage if you have mortgage interest that you must pay regardless.

But it’s better yet to neither have the expenses, nor the tax deductions.

[Coronita]

[quote=TemekuT]Let’s all pay $3 interest so we can save $1 in taxes. That’s after adjusting for the benefit on the first portion of taxable income of $5,800 single and $11,600 married, available to all via the standard deduction. Then, be sure to adjust for AMT as Schedule A deductions are limited and personal and dependency exemptions are phased out as AGI increases. Okay, ready now? Let’s all rush out and acquire lots of “tax deductions” so we can all save money on our taxes.[/quote]

Correct me if I’m wrong but…

*The mortgage interest deduction for a primary resident does NOT normally get AMT limited.

Under even normal tax calculations, mortgage interest deduction can get phased out, but it’s gradual, unless your AGI is way way up there.

*Property Taxes, State Income Taxes, Personal Property Taxes are EXCLUDED from AMT calculations

So… If you have a high AGI and have a lots of deductions and am still hitting AMT, it’s because your state come/property/personal prop taxes aren’t doing didly squat in the current year. That’s also why you might want to check whether you want to pay your property taxes this year or next….

[TemekuT]

[quote=flu][quote=TemekuT]Let’s all pay $3 interest so we can save $1 in taxes. That’s after adjusting for the benefit on the first portion of taxable income of $5,800 single and $11,600 married, available to all via the standard deduction. Then, be sure to adjust for AMT as Schedule A deductions are limited and personal and dependency exemptions are phased out as AGI increases. Okay, ready now? Let’s all rush out and acquire lots of “tax deductions” so we can all save money on our taxes.[/quote]

Correct me if I’m wrong but…

*The mortgage interest deduction for a primary resident does NOT normally get AMT limited.

Under even normal tax calculations, mortgage interest deduction can get phased out, but it’s gradual, unless your AGI is way way up there.

*Property Taxes, State Income Taxes, Personal Property Taxes are EXCLUDED from AMT calculations

So… If you have a high AGI and have a lots of deductions and am still hitting AMT, it’s because your state come/property/personal prop taxes aren’t doing didly squat in the current year. That’s also why you might want to check whether you want to pay your property taxes this year or next….[/quote]

I swore I would stop posting tax code here and I don’t work with tax prep anymore, but, since my last tax refresher course was 3 years ago, and now that I’ve had to do a quick review of AMT so I could defend my post, the following are considered for AMT purposes:

1. Personal and dependency exemptions are not allowed as deductions for AMT.

2. Property tax deductions are not allowed for AMT. Futhermore, state and personal property taxes are not allowed.

3. Only the interest on mortgages related to the home is allowed. The portion related to the allowed $100,000 deductible for a home equity line not related to home improvements is excluded.

4. There are other Schedule A items that are subject to AMT.

I won’t bother to mention the less common Schedules B & D items that are subject to AMT, except to note that those items are common to high earning, high net worth individuals.

Furthermore, consider that many taxpayers take deductions for non-allowable items…Mello Roos and other bond items, and deductions for non-allowable mortgage interest in excess of basis.

One basic guide I used to give taxpayers that were subject to AMT was never prepay property tax or the 4th state quarterly estimate, as the benefit would be wiped out from the AMT.

Good news regarding the phase-out of itemized deductions. This provision has been repealed for 2011. That means it’s still part of tax code so who knows what will be decided in 2012.

In 2010 35% of taxpayers earning between $100,000 and $200,000 were subject to AMT. I don’t consider that income level to be high in most areas of California.

Now, the reason for my initial snarky post – based on my CPA background and years of real estate sales – most people significantly overestimate the tax advantages of home ownership. The less informed do not understand the benefit of the standard deduction amount. The more informed do not understand the AMT nor the deduction phaseout. Many deduct non-allowable portions of propery tax and mortgage interest. The tax code is a train wreck and subject to the whims of Congress from year to year. Pay interest if you will, but don’t overestimate the tax savings when making your calculations. And plan on the mortage interest deduction being whacked in the near future. After all, somehow the deficit has to be reduced, or at least held stable.

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