Extra Mortgage Payments vs Lump Sum Payments
by Joey V. in New York, by Landon in Berkeley, and by Sonia in Maumee, OH
Homeowners ask Kate about extra mortgage payments vs lump sum payments to pay off a mortgage early: I can't imagine who doesn't want to get out of debt. Especially today! Meet Joey with concerns that his lender limits extra lump-sum principal payments.
Meet Landon who wants to pay down his mortgage and reduce his payment. Lastly is Sonia, horrified to see how little has gone to pay off her mortgage in the last 7 years.
Q 1: Pre-Payment of Principal By Joey V. in New York, New York
Hello Kate, I wish to pay my mortgage of $52,000 off. I am quite aware of bi-monthly payments, as well as adding a little extra to my monthly payment of the mortgage.
However, I am interested in paying additional to the principal. To my understanding, you are limited to either 15 percent or 20 percent of the original loan.
So, I would be limited to paying either $7,500.00 (15%) or $10,000.00 (20%) per year? Is this scenario correct? Does this limitation exist?
Kindly advise at your convenience. Thank you in advance, Joe.
Ask Kate answers: Pre-Payment of Principal
Is there a pre-payment penalty attached to your mortgage?
Even so, common prepayment penalty agreements often allow extra lump-sum principal payments as long as the amount does not exceed a specified percentage of the original balance.
I might also add that sometimes the penalty will be waived if the house is sold. Commonly, the pre-payment penalty expires after 2 to 5 years.
But most importantly, not all mortgages have pre-payment penalties. In fact, the majority do not.
Want to check to see if you have one? Dig out final documents for your current mortgage. Look for a Pre-Payment Rider that goes with the Promissory Note.
If you are sure nothing in the paperwork points to a pre-payment penalty, you should be free to pay additional lump-sums to the principal without limitation.
But call your loan servicer (the company you send your monthly mortgage payment to) to verify you are not limited by a pre-payment penalty before sending in extra payments.
Best wishes for paying off your mortgage early,
Q 2: Extra Mortgage Pre-Payment to Lower Monthly Payments By Landon in Berkeley, CA
Kate, I have a question about prepayment. Let's say I have a $500,000 loan amount, paying 4%, at a duration of 30 years. That comes to be $2,387.08 I would have to pay once a month, for 30 years.
Now, let's say I had a windfall of $100,000. By conventional mortgage prepayment, that would decrease the life of the loan (cutting off 9 years, reducing the term to around 21 years) and keep my mortgage payment at the same $2387.08.
I would like the opposite to occur. If I had that $500,000, 30 year loan at 4% paying $2387.08 per month.
Then I get the same windfall of $100,000 and I immediately apply it to the loan. I would like the duration of my loan to be the same (30 years), but I want my monthly payment to go down to $1909.66.
(I got that number by using my mortgage calculator and assuming a $400,000 loan amount instead of $500,000). Can I do this?
I know that refinancing would effectively do this, but there are penalties to that, plus I would be subject to a change in my interest rate (rates are very low, so I want to lock in my rate for a long time).
Also, I understand my example is somewhat contrived, if that were really the case, I should wait a month and use that $100,000 as part of the downpayment and get a smaller loan.
What if I get the windfall at the 5 year mark? What if it's not a windfall, but I just want to do an extra $100 a month every month for 30 years.
Can I get a mortgage like this?
Ask Kate answers: Extra Mortgage Pre-Payment to Lower Monthly Payments
As I understand your questions, you would like to know if paying down your mortgage balance with a sizable sum can result in a reduction to your mortgage payment instead of reducing the term.
Most often, with fixed rate mortgages, borrower could expect shorter mortgage terms under your scenario. But the final loan documents will have your answer.
Now here are a couple of exceptions to a reduction in monthly mortgage payments without refinancing and why I never say never!
1) Once during rapid drops in interest rates, I worked for a lender who offered payment modifications to keep from losing borrowers during a refinancing frenzy.
But the offer was only extended to borrowers with adjustable rate mortgages with potential for negative amortization
Interestingly when mortgage rates dropped dramatically, it resulted in accelerated amortization which enabled the banks to make those offers.
2) Borrowers with adjustable rate mortgages do not always experience increases when rates adjust. In the case of decreasing rates, the monthly payments normally follow.
Likewise, paying down principal balances with lump sums before adjustments could result in even lower payments, in the absence of pre-payment penalties
Again, homeowners need to read their mortgage documents as terms differ.
Back to your question, the only way to know if the mortgage terms you describe exist is to ask lenders as you shop. But beware of verbal promises. In writing. In writing.
Q 3: Why Doesn't My Payment Reduce My Mortgage Balance By Sonia in Maumee, OH
Hi Kate, my husband and I purchased our home with $0 down back in January 2007. The loan amount was for $129K and monthly payment is $1200 we have never missed payments. Our balance in 2013 if $122K.
This just baffles me. Out of all the money we pay our balance has only dropped $7K. How is this possible? Can you explain how this happens?
Ask Kate answers: Why Doesn't My Payment Reduce My Mortgage Balance
Yes, a little depressing, right? This is called mortgage amortization and exactly why I wrote The Mortgage Freedom Project
to show homeowners how to beat the bank at its own game.
Lenders make the most money during the first few years of a mortgage. When refinancing takes place, the game begins anew. So let's do this!
First of all, make sure your mortgage payments are being properly credited to your account each month. Contact your loan servicer to get a monthly accounting of your payments. It will be divided between principal payments that reduce your mortgage balance and interest payments that go to the bank.
Secondly, start your plan to pay off your mortgage and break free of the bank
Go here for more details: Is Paying Off My Mortgage Early a Smart Plan
and How to Painlessly Pay Off a Mortgage
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