Help with Mortgage-speak!

[moneypenny02]

Hi, 

I am trying to explain something to my mortgage broker, but I am having a hard time getting my question across or really understanding whether he is answering me.  Hopefully someone here can give me the correct terms to use to communicate with him properly.  

Background: We have already closed on our mortgage and we are about 3 months into paying. This is my first mortgage, but I have a LOT of experience with student loans.  With my student loan, for example, $500 is due the 1st of every month, which includes principal and interest on my 30-year payment schedule.  If I pay $500 on January 25th in advance of my February due date, then I have paid all of the interest for that month, as well as a little bit to the principal. Assuming my payment gets applied immediately, interest starts to accrue again on January 26th.  If I make a payment on January 26th for $500 and select "apply this to my next payment", then the result of that is that it goes about 99% to principal, and only a little bit to whatever interest has accrued btwn my 1st and second payment.  I do this every month, so I keep getting more and more payments "ahead" of schedule.  I have used this method instead of just adding a $500 principal payment so that I can pay down my principle faster AND give me a cushion so that if something happens in the future and I cannot afford to make the payments.  (The next "due" date on my loan isn't until Oct. 2014, but I still pay each month.)

Now for my mortgage loan.  It is a 30 year fixed rate mortgage, with no prepayment penalty.  Let's say it is $2000/mo, and the most recent payment includes $1500  to interest and $500 to principal.  It is due the 1st of each month.  I just made a payment of $2000 for the payment due March 1st. The next day I made another $2000 payment toward my payment due April 1st.  I believe this should work the same way as my student loan--because I JUST made a payment, there should be no more outstanding interest, and the entire payment, although made toward the April 1st loan payment, should end up going almost completely to the principal.  The loan person that I spoke with not only did not agree, he couldn't even understand how it would work that an entire payment would get credited to prinicpal.  He kept saying something over and over about the interest being paid in arrears, but I don't think he really understood the math behind anything that he was saying.

Can someone please explain to me in technical terms why the student loan works that way (e.g. amortization, compounding, etc.), and if there is any reason that my mortgage loan should not?  I don't even know the right questions to ask, so I don't know how to make my case, or if I should accept that they are correct.  

Thank you!     

[DallasLoanGuy]

at the end of the yr.... how many payments are made?

timing of the payments is very little in inteterest savings.

you aren't beating the system..... either you are paying MORE than the required payments or not

[moneypenny02]

I am absolutely paying more than the number of required payments each year, but that is intentional (I will make 24 payments/year).  I can also tell you with 100% certainty that with my student loan payments the way that I make my payments the principal is reducing faster than if I timed them differently.  

In any event, if I pay $500 extra on my student loan my options are either: 1) allocate it totally to principal, so the interest reduces faster, but I still have to pay every month regardless; or 2) pay additional payments so that I have the cushion in case something happens and I am unable to make my loan payments in the future, but not get the benefits of maximizing my principal reduction.  The timing that I make my payments allows me to achieve both--and I can see how my payments are allocated between interest and pincipal, and if I pay back to back (or even on the same day) I can see that either nothing or less than $5 is allocated to interest on my second payment.

So, trust me.  This is happening.  If you are knowledgeable about how loans are structured to explain why this would be true on a student loan (standard Sallie Mae, 30-year payment, fixed interst, no prepayment penalty) but not a mortgage loan (standard 30-year-fixed, no prepayment penalty.  That would be helpful.  For instance, if I have already made the payment that is due March 1st, and then immediately make the payment for April 1st, over what time period is the interest allocated in the April payment accruing? (It should not have acrrued yet, and it has not for my student loan)  

There could be something different in the structure of the loans that explains this, but no one has explained it so far.    

[DallasLoanGuy]

the double payment is likely 99% of the reduction unless student loans amortize weird.

the interest savings is pretty nominal in any calculation i tried in the past.

be careful and watch due dates on the mortgage.... lenders have been known to apply extra payments to escrow....  

i don't think you can pay the mortgage ahead so that you can skip a month in the future.

it would be a good question for the servicing lender

[moneypenny02]

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@DallasLoanGuy wrote:

the double payment is likely 99% of the reduction unless student loans amortize weird.

the interest savings is pretty nominal in any calculation i tried in the past.

be careful and watch due dates on the mortgage.... lenders have been known to apply extra payments to escrow....  

i don't think you can pay the mortgage ahead so that you can skip a month in the future.

it would be a good question for the servicing lender

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Yes, I am certain that the double payment is 99% of the reduction.   I am trying to understand why, for the student loan, if I make back to back payments, the 2nd payment is allocated 99% to principal and only 1% to interest because only a very small amount of interest has accrued between my two payments, but the Mortgage person is saying that this is not the case when I make back to back payments on the Mortgage.  My mortgage can definitely be paid ahead--the fact that I paid my loan due April 1st, the next loan due date that is shown for my bill (online) is May 1st.  So, it is paid ahead.  

I already spoke to the servicer (that is what I meant, although in my case, they are the same people) about it, but we could not understand each other, so to speak, so I am hoping to get some guidance in how loans are structured/interest compounded and amortized, etc.  so that I can communicate better (and also figure out if they are doing something that they are not permitted to do under the terms of the loan--wouldn't be the first time!!).  

[n0smirc]

On my prior mortgage, we were serviced by Wells Fargo and they would have a payment due every month regardless of anything that might've been paid extra. As it so happens, my mother-in-law and I both attempted to pay several months. She was doing it as a gift and I was making the payment because it was my house. I later took a very close look at my statements because I thought the balance was reducing a bit quicker than I expected. The second payment that arrived went 100% to principal. The payment due date never changed nor did the payment reduce. Unless I made a call, they would simply put it towards principal.

Some servicers apply it to the next payment, or however you tell them to apply it. And of course, some just put it in escrow. It's best to specify to them how to apply the extra payment. 

[DallasLoanGuy]

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@moneypenny02 wrote:

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@DallasLoanGuy wrote:

the double payment is likely 99% of the reduction unless student loans amortize weird.

the interest savings is pretty nominal in any calculation i tried in the past.

be careful and watch due dates on the mortgage.... lenders have been known to apply extra payments to escrow....  

i don't think you can pay the mortgage ahead so that you can skip a month in the future.

it would be a good question for the servicing lender

---

Yes, I am certain that the double payment is 99% of the reduction.   I am trying to understand why, for the student loan, if I make back to back payments, the 2nd payment is allocated 99% to principal and only 1% to interest because only a very small amount of interest has accrued between my two payments, but the Mortgage person is saying that this is not the case when I make back to back payments on the Mortgage. he is wrong. the 2nd payment is applied to principle if so noted on the check. although i have heard some banks apply it to escrow. you have to stay on top of it.  My mortgage can definitely be paid ahead--the fact that I paid my loan due April 1st, the next loan due date that is shown for my bill (online) is May 1st.  So, it is paid ahead.   right, it appears that way but it isnt. because interest is paid in arrears... so when you make a payment on april 1st.... you are paying march interest(you were behind because you paid AFTER interest accrued) and a little principle. the fact that it is DUE may 1st doesn't mean it is paid ahead.... it means that may 1st is when april interest is due along with a little principle,

I already spoke to the servicer (that is what I meant, although in my case, they are the same people) about it, but we could not understand each other, so to speak, so I am hoping to get some guidance in how loans are structured/interest compounded and amortized, etc.  so that I can communicate better (and also figure out if they are doing something that they are not permitted to do under the terms of the loan--wouldn't be the first time!!).  

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[moneypenny02]

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@DallasLoanGuy wrote:

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@moneypenny02 wrote:

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@DallasLoanGuy wrote:

the double payment is likely 99% of the reduction unless student loans amortize weird.

the interest savings is pretty nominal in any calculation i tried in the past.

be careful and watch due dates on the mortgage.... lenders have been known to apply extra payments to escrow....  

i don't think you can pay the mortgage ahead so that you can skip a month in the future.

it would be a good question for the servicing lender

---

 My mortgage can definitely be paid ahead--the fact that I paid my loan due April 1st, the next loan due date that is shown for my bill (online) is May 1st.  So, it is paid ahead.   right, it appears that way but it isnt. because interest is paid in arrears... so when you make a payment on april 1st.... you are paying march interest(you were behind because you paid AFTER interest accrued) and a little principle. the fact that it is DUE may 1st doesn't mean it is paid ahead.... it means that may 1st is when april interest is due along with a little principle, 

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  This is my point though-- If on Feb 24th I paid the payment due on March 1st--this paid the Feb interest.  But then if AFTER THAT PAYMENT IS MADE, I make a payment on Feb 25th to pay the payment due on Apr. 1st, which would pay the March interest.  But March has not started yet.  There is no interest to pay.  Why am I making payments on interest for a time period that has not even started yet?  Even if the interest is only calculated once a month, BOTH payments were made before the end of February, so its not like the March interest period even started ticking yet.   

[Peter1142]

http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Extra payments are applied only to principal. Interest is charged only at the scheduled payments. If you make a payment on Feb 25th and you already paid on Feb 24th, it should be an extra payment towards principal.

[moneypenny02]

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@Peter1142 wrote:

http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Extra payments are applied only to principal. Interest is charged only at the scheduled payments. If you make a payment on Feb 25th and you already paid on Feb 24th, it should be an extra payment towards principal.

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This is not true for me.  I guarantee you.  I am looking at the allocation of the payment and it is the same allocation as if I had made my April 1st payment on May 31st instead of Feb 25th.  

There is the option to allocate just to principal, or to make the next scheduled payment.  I chose the latter, but I did it at a time when there should have been no interest that accrued yet for the month of March. 

If someone can explain the way in which interest is calculated on a mortgage loan--and how or why this would be different from a student loan-- that would be helpful.