Not being educated in these matters, I have a question for the financial gurus here that my wife and I need answered. We called our mortgage company for a answer and ended up getting the dance of dances. We do have the "principal payment only" option on our short note, as I requested when taking the loan... So,

We want to get our small home mortgage paid off sooner , by making extra payments applied to the principal only since my "golden" years are now in sight, and I dont want any payments after my paychecks stop...

We do not understand how when we have a fixed loan amount and if we choose to pay down the principle faster each month , how that gets redone in the payment process ??

Example: Just for easy numbers lets say there is a loan of $40,000 taken on a 15 year fixed note, at 7% APR. The monthly payments with principal , interest and taxes would be $500.00.

If the homeowner starts sending in "principal only " checks of $500.00 along with their normal mortgage payment check of $500.00, how does the mortgage companies on paper, account for this ? As the principal amount of the loan drops twice as much each month, they cannot lower the monthly payment because the amount of scheduled payment is already set up for the duration of 15 years , right??


So how does this mortgage"principal payment only " system work on fixed notes ??? It looks like one could pay off the note in 7.5 years at this rate of additional principal only payment, but the mortgage note is set at 15 years. How are the mortgage companies doing the paperwork on these scenarios, without setting up new loans ? thanks

 

It's a little more complicated than that, but it's still not that bad. You're actually MORE than doubling your principal payment each month if you double your payment (provided the extra is only applied to the principal amount). In the example you gave, your first payments will only include about $250 or so in principal payments, the rest is interest. The way it works is that the loan is set up and figured for 15 years in that case, but interest is only compounded (applied) every so often, usually annually on mortgages, sometimes quarterly. You pay off the interest in full between each interest compounding. So, in your example, the interest may be compounded at 7% on $40,000 annually, which means the first year's interest is $2800, or $233.33/mo. The rest of the payment goes to principal, and its size is what determines the length of the loan. If your principal payment was only $1 on top of that interest, then the next year's interest compounding would be on $39,988, and so on.

On paper, the amount in your loan account is separated into two sections (unless you have escrow accounts for taxes and insurance): the principal amount, which never goes up, only down by the amount of principal you pay each month, and the interest portion, which goes up when the interest is compounded and is zero right before the interest is compounded.

The calculations are pretty complex to work out by hand, but there are tables in accounting books that can get you close, there are financial calculators available in physical form, or I'm sure there are some online somewhere. Here's one:

http://mortgages.interest.com/content/calculators/monthly-payment.asp

That's the gist of it. I could be a little off on some of the minor details since it's been a while since I took accounting.

Jason

 

I assume you get a statement every month. the simple way is to just add an additional amount to your regular payment. What'll happen on the next statement is the additional will get creditied toward the principal balance,and a new balance and payment will show up.

 

What I have always been told is that if you pay twice, they handle both monthly payments the same way, i.e. interest and principal. If you make a larger single payment, they take the calculated amount of interest out (1/12 of the annual 7% interest in the example above), and the rest goes straight to principal.
At least that's my understanding of the process. I know in the late 80's, my mother programmed one of the first homeowner-use amortzit programs to calculate the payments based on the daily interest and principal payments.

 

Just to add some more sites to do research on: There's www.bankrate.com which has several loan and mortgage calculators that let you see how extra payments effect your loan. Also, there's www.clarkhoward.com which has alot of financial planning help as well as several links.

 

Also, be sure that your loan contract does not include 'prepayment penalties.'

 

I forgot to add that some lenders require that you explicitly specify when you are paying extra toward your principal amount. If your monthly payment is $500 and you send them $1000, you have to specify that the extra $500 is to go toward principal.

Jason

 

Thanks guys, great links and tips you have posted. I am getting some good info from them and learning a lot about home loans.

 

If your payment including interest is say $500.00 and you pay an additional $500.00 per month to principal, you will pay off a 15 year mortgage much sooner than 7.5 years. As said above you will actually be paying something like 3 times (or more) your beginning principal amount.

If you use one of the loan calculators to figure the payment, you can determine what you need to pay per month to pay-off the note in a specific frame.

Good luck.