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Bi weekly mortgage payment letter

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stan_the_man
Established Contributor

Re: Bi weekly mortgage payment letter


@Walt_K wrote:

@Booner72 wrote:

@sharpie wrote:

When you send in the extra, you need to indicate you want it applied to the principal.

 

 


OK - IDK even who my bank is going to be yet bc it hasn't been sold yet, and if it has, noone has contacted me yet.  I hope it's not BoA based on all the hell I've read about them here!

 

 

Anyway, what ELSE would the extra be applied to?  Will I be able to just call them up once they figure out who they are and tell them I'm paying an extra 75 bucks each payment and to apply that to the principal?


I'm pretty sure the default if you don't specify is usually for any extra to be applied to your next payment.  So if you were to send double your payment in without specifying, the next month you wouldn't have to send a payment.  If you did, it would just advance again.  It's probably specified in your loan documents how overpayments are to be handled if you don't specify what to do with it.

 

As far as how you let them know, if it's set up for you to pay online, it will probably be as easy as putting the amount you want paid exta in the box labeled principal.  If you're actually mailing checks, probably just write it in the memo section.  


I was thinking this through and when it comes to mortgages, as opposed to other installment loans, the pitfall of not defining how the extra payment should be applied is that the bank may apply all (or a portion) of the overpayment to your escrow account, as opposed to the loan balance.

 

In a normal installment loan, it shouldn't matter because whatever amount I overpay will reduce the principal and accrued interest by exactly the same amount (i.e. if I overpay DW's student loan by $1,000, the overall amount owed will decrease by $1,000). The only difference is when the expect you to make your next payment (or when they will auto-draft you if you have an auto payment plan setup).

 

An example of this in real life was when my mother went to the bank to make a mortgage payment in the early 1990s, and the teller informed my mom that their escrow balance exceeded the mortgage balance. My mom's not too good with financial numbers, so she asked them to write it down. The bank President (of this three branch community bank where the manager knew my parents by name and vice versa) sat down with my mother and wrote the exact numbers down for my father to review.

 

We came back the next day to payoff the mortgage with the escrow account, and my mom left with a bank check for the refund of the excess funds from the escrow account.

Message 21 of 61
Walt_K
Senior Contributor

Re: Bi weekly mortgage payment letter


@stan_the_man wrote:

@Walt_K wrote:

@Booner72 wrote:

@sharpie wrote:

When you send in the extra, you need to indicate you want it applied to the principal.

 

 


OK - IDK even who my bank is going to be yet bc it hasn't been sold yet, and if it has, noone has contacted me yet.  I hope it's not BoA based on all the hell I've read about them here!

 

 

Anyway, what ELSE would the extra be applied to?  Will I be able to just call them up once they figure out who they are and tell them I'm paying an extra 75 bucks each payment and to apply that to the principal?


I'm pretty sure the default if you don't specify is usually for any extra to be applied to your next payment.  So if you were to send double your payment in without specifying, the next month you wouldn't have to send a payment.  If you did, it would just advance again.  It's probably specified in your loan documents how overpayments are to be handled if you don't specify what to do with it.

 

As far as how you let them know, if it's set up for you to pay online, it will probably be as easy as putting the amount you want paid exta in the box labeled principal.  If you're actually mailing checks, probably just write it in the memo section.  


I was thinking this through and when it comes to mortgages, as opposed to other installment loans, the pitfall of not defining how the extra payment should be applied is that the bank may apply all (or a portion) of the overpayment to your escrow account, as opposed to the loan balance.

 

In a normal installment loan, it shouldn't matter because whatever amount I overpay will reduce the principal and accrued interest by exactly the same amount (i.e. if I overpay DW's student loan by $1,000, the overall amount owed will decrease by $1,000). The only difference is when the expect you to make your next payment (or when they will auto-draft you if you have an auto payment plan setup).

 

An example of this in real life was when my mother went to the bank to make a mortgage payment in the early 1990s, and the teller informed my mom that their escrow balance exceeded the mortgage balance. My mom's not too good with financial numbers, so she asked them to write it down. The bank President (of this three branch community bank where the manager knew my parents by name and vice versa) sat down with my mother and wrote the exact numbers down for my father to review.

 

We came back the next day to payoff the mortgage with the escrow account, and my mom left with a bank check for the refund of the excess funds from the escrow account.



It does matter for an installment loan.  There's a difference between them holding your payment against a future payment and actually using that payment to reduce principal thereby reducing the balance against which your interest is calculated.   


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


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Message 22 of 61
stan_the_man
Established Contributor

Re: Bi weekly mortgage payment letter


@Walt_K wrote:

@stan_the_man wrote:

@Walt_K wrote:

@Booner72 wrote:

@sharpie wrote:

When you send in the extra, you need to indicate you want it applied to the principal.

 

 


OK - IDK even who my bank is going to be yet bc it hasn't been sold yet, and if it has, noone has contacted me yet.  I hope it's not BoA based on all the hell I've read about them here!

 

 

Anyway, what ELSE would the extra be applied to?  Will I be able to just call them up once they figure out who they are and tell them I'm paying an extra 75 bucks each payment and to apply that to the principal?


I'm pretty sure the default if you don't specify is usually for any extra to be applied to your next payment.  So if you were to send double your payment in without specifying, the next month you wouldn't have to send a payment.  If you did, it would just advance again.  It's probably specified in your loan documents how overpayments are to be handled if you don't specify what to do with it.

 

As far as how you let them know, if it's set up for you to pay online, it will probably be as easy as putting the amount you want paid exta in the box labeled principal.  If you're actually mailing checks, probably just write it in the memo section.  


I was thinking this through and when it comes to mortgages, as opposed to other installment loans, the pitfall of not defining how the extra payment should be applied is that the bank may apply all (or a portion) of the overpayment to your escrow account, as opposed to the loan balance.

 

In a normal installment loan, it shouldn't matter because whatever amount I overpay will reduce the principal and accrued interest by exactly the same amount (i.e. if I overpay DW's student loan by $1,000, the overall amount owed will decrease by $1,000). The only difference is when the expect you to make your next payment (or when they will auto-draft you if you have an auto payment plan setup).

 

An example of this in real life was when my mother went to the bank to make a mortgage payment in the early 1990s, and the teller informed my mom that their escrow balance exceeded the mortgage balance. My mom's not too good with financial numbers, so she asked them to write it down. The bank President (of this three branch community bank where the manager knew my parents by name and vice versa) sat down with my mother and wrote the exact numbers down for my father to review.

 

We came back the next day to payoff the mortgage with the escrow account, and my mom left with a bank check for the refund of the excess funds from the escrow account.



It does matter for an installment loan.  There's a difference between them holding your payment against a future payment and actually using that payment to reduce principal thereby reducing the balance against which your interest is calculated.   


Unless an installment loan has some weird payment allocation rules, it should look something like Nelnet's allocation rules (it should say "accured interest" -- interest since the last payment):

 

Payments are always applied first to fees (if applicable), interest, and then to principal.

 

So, in this example, I make the double payment ($2,000 instead of $1,000) on the same day, and that my $1,000 payment would normally cover $800 of principla and $200 of accured interest (and that there are no fees). My first payment goes first to fees ($0), then accured interest ($200) and finally to principal ($800). Then the second payment goes to fees ($0), then accured interest ($0) and finally to principal ($1,000).

 

So long as I continue to make double payments the first payment will pay the accured interest (which should be slowly decreasing every month) and some portion of principal, while the second payment will only be applied to principal because there is no accured interest.

 

Whether my bank sees that 2nd payment as fulfilling my obligation to pay a future installment payment, or not, my principal balance still goes down by the exact same amount. So long as you continue to make the additional payment every month, you should see the exact same effect on your balance (unless there a different payment allocation rule, like appling a portion of your payment -- before principal -- to an escrow account for taxes and insurance).

Message 23 of 61
Walt_K
Senior Contributor

Re: Bi weekly mortgage payment letter


@stan_the_man wrote:

Unless an installment loan has some weird payment allocation rules, it should look something like Nelnet's allocation rules (it should say "accured interest" -- interest since the last payment):

 

Payments are always applied first to fees (if applicable), interest, and then to principal.

 

So, in this example, I make the double payment ($2,000 instead of $1,000) on the same day, and that my $1,000 payment would normally cover $800 of principla and $200 of accured interest (and that there are no fees). My first payment goes first to fees ($0), then accured interest ($200) and finally to principal ($800). Then the second payment goes to fees ($0), then accured interest ($0) and finally to principal ($1,000).

 

So long as I continue to make double payments the first payment will pay the accured interest (which should be slowly decreasing every month) and some portion of principal, while the second payment will only be applied to principal because there is no accured interest.

 

Whether my bank sees that 2nd payment as fulfilling my obligation to pay a future installment payment, or not, my principal balance still goes down by the exact same amount. So long as you continue to make the additional payment every month, you should see the exact same effect on your balance (unless there a different payment allocation rule, like appling a portion of your payment -- before principal -- to an escrow account for taxes and insurance).



You're citing to a payment allocation rule that specifically works to reduce principal for any overpayment.  That is the default rule for that loan program so of course overpayment is going go to principal.  And your bank doesn't see that as fulfilling a future payment. 

 

Some loan programs don't work that way.  I didn't mean that all installment loans will advance your due date, I meant that you need to check your loan program to see how it works.  In some instances, the overpayment is by default held to apply to a future payment so that the due date is advanced.  If you have such a program, you need to specify that they apply the overpayment toward principal.  Otherwise, you won't be making any extra headway on reducing the amount of interest you will pay. 


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


Take the FICO Fitness Challenge
Message 24 of 61
Booner72
Senior Contributor

Re: Bi weekly mortgage payment letter

Ok - Thanks so much everyone for all your thoughts on this.  Hopefully my online payment will be set up like MV's so I can just put the numbers in - if not, then I will do it the old fashioned way, pay online what is due, then MAIL in a check that will have info on the memo line that says "FOR PRINCIPAL ONLY".

 

THANKS Again

STARTING: 11/24/10 EQ-584 EXP-648 TU04-595
CLOSED FIRST HOME 8/19/11 EQ-630 EXP-691 TU04-653
CURRENT: EQ-701 EXP-??? TU08-720
Message 25 of 61
stan_the_man
Established Contributor

Re: Bi weekly mortgage payment letter


@Walt_K wrote:

@stan_the_man wrote:

Unless an installment loan has some weird payment allocation rules, it should look something like Nelnet's allocation rules (it should say "accured interest" -- interest since the last payment):

 

Payments are always applied first to fees (if applicable), interest, and then to principal.

 

So, in this example, I make the double payment ($2,000 instead of $1,000) on the same day, and that my $1,000 payment would normally cover $800 of principla and $200 of accured interest (and that there are no fees). My first payment goes first to fees ($0), then accured interest ($200) and finally to principal ($800). Then the second payment goes to fees ($0), then accured interest ($0) and finally to principal ($1,000).

 

So long as I continue to make double payments the first payment will pay the accured interest (which should be slowly decreasing every month) and some portion of principal, while the second payment will only be applied to principal because there is no accured interest.

 

Whether my bank sees that 2nd payment as fulfilling my obligation to pay a future installment payment, or not, my principal balance still goes down by the exact same amount. So long as you continue to make the additional payment every month, you should see the exact same effect on your balance (unless there a different payment allocation rule, like appling a portion of your payment -- before principal -- to an escrow account for taxes and insurance).



You're citing to a payment allocation rule that specifically works to reduce principal for any overpayment.  That is the default rule for that loan program so of course overpayment is going go to principal.  And your bank doesn't see that as fulfilling a future payment. 

 

Some loan programs don't work that way.  I didn't mean that all installment loans will advance your due date, I meant that you need to check your loan program to see how it works.  In some instances, the overpayment is by default held to apply to a future payment so that the due date is advanced.  If you have such a program, you need to specify that they apply the overpayment toward principal.  Otherwise, you won't be making any extra headway on reducing the amount of interest you will pay. 


Actually, they advance the due date unless I specify otherwise but the allocation is the same nonetheless. I believe the American Honda Finance Corporation had the same rules.

 

Furthermore, unless there is a pre-payment penalty or it is a simple interest loan, I don't see what how any bank could apply you overpayment in a way that does not reduce the principal balance on the loan -- and therefore the interest paid. The only way I wouldn't see a reduction of total interest paid was if either:

 

A) My payment was being allocated to something other than the loan balance (i.e. an escrow account for taxes and/or insurance)

 

B) I didn't continue to make regular payments, and the interest accured until the next payment was due was essentially capitalized.

 

Maybe I'm wrong, but I don't see how any bank could apply a payment against interest that has yet to be accured.

Message 26 of 61
Walt_K
Senior Contributor

Re: Bi weekly mortgage payment letter


@stan_the_man wrote:

@Walt_K wrote:

Actually, they advance the due date unless I specify otherwise but the allocation is the same nonetheless. I believe the American Honda Finance Corporation had the same rules.

 

Furthermore, unless there is a pre-payment penalty or it is a simple interest loan, I don't see what how any bank could apply you overpayment in a way that does not reduce the principal balance on the loan -- and therefore the interest paid. The only way I wouldn't see a reduction of total interest paid was if either:

 

A) My payment was being allocated to something other than the loan balance (i.e. an escrow account for taxes and/or insurance)

 

B) I didn't continue to make regular payments, and the interest accured until the next payment was due was essentially capitalized.

 

Maybe I'm wrong, but I don't see how any bank could apply a payment against interest that has yet to be accured.


Sorry I'm not being clear.  Here is what happens.  They don't technically apply it against anything.  They just hold it to be applied toward future payment.  So assuming you have a monthly payment of $250 and you are making a payment of $500, what happens when they don't apply it to principal but hold toward future payment is that they take the $250 and it just sits there waiting to be used for next month.  If you do the same thing next month, you now have two months sitting there for the next two months.  And so on.  Since it isn't getting applied to principal, there is nevery any reduction in the interest you are paying. 

 

Without getting too much into the weeds on exact payment breakdowns, let's assume your loan had 12 payments of $250 left.  If your extra payments were getting applied to principal, you'd end up paying off early and would actually pay less than $3000 total (12*$250).  But if they are just holding the money toward a future payment, you still pay off early, but you pay the same amount in interest.  After 6 months, they'd have the other 6 payments and they would apply them as they came due. 

 

ETA: here's some examples http://www.myjourneytomillions.com/articles/my-extra-payments-towards-my-auto-loan-was-not-being-app...

http://moneyning.com/money-mailbox/how-do-extra-payments-get-applied-to-my-loan-money-mailbox/


Starting Score: ~500 (12/01/2008)
Current Score: EQ 681 (04/05/13); TU 98 728 (01/06/12), TU 08? 760 (provided by Barclay 1/2/14), TU 04 728 (lender pull 01/12/12); EX 742 (lender pull 01/12/12)
Goal Score: 720


Take the FICO Fitness Challenge
Message 27 of 61
MarineVietVet
Moderator Emeritus

Re: Bi weekly mortgage payment letter


@Booner72 wrote:

Ok - Thanks so much everyone for all your thoughts on this.  Hopefully my online payment will be set up like MV's so I can just put the numbers in - if not, then I will do it the old fashioned way, pay online what is due, then MAIL in a check that will have info on the memo line that says "FOR PRINCIPAL ONLY".

 

THANKS Again


I would think WF is big enough to offer the same kind of payment options that Chase does. Let us know what happens with this.

 

 

 

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

Message 28 of 61
Booner72
Senior Contributor

Re: Bi weekly mortgage payment letter

I'm so embarrassed.  P R I N C I P L E

STARTING: 11/24/10 EQ-584 EXP-648 TU04-595
CLOSED FIRST HOME 8/19/11 EQ-630 EXP-691 TU04-653
CURRENT: EQ-701 EXP-??? TU08-720
Message 29 of 61
MarineVietVet
Moderator Emeritus

Re: Bi weekly mortgage payment letter


@Booner72 wrote:

I'm so embarrassed.  P R I N C I P L E


I'm not sure what you mean. The correct spelling is loan principAL.

 

 

 

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

Message 30 of 61
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