$10,000 Mortgage Payment Question

A.:

When you make that extra payment - it reduces the principal amount of your mortgage, cutting the interest you would have been paying on your mortgage. how much interest did you shave off your mortgage? A good chunk. Time? I don't know. If you have NOT specified that that extra is to applied to the principal, the lender will NOT automatically apply it. YOU HAVE TO TELL THEM TO APPLY TO PRINCIPAL.

Your statement won't change. You are set for 30 years. If you make your standard payments you will still show 16 years and 9 months on your loan. As that is what they are expecting. If you continue to pay towards the principal every month - you will most likely shave 7 to 10 years off your mortgage.

I'm not sure how else to explain to your friend, other than telling him the difference between principal and interest. When you make a regular mortgage payment (as your statement shows), a portion goes to principal reducing your overall amount owed, and a portion goes to interest, which only goes to the lender. My making the extra $10,000 payment to principal only, you have reduced your overall balance without paying any interest.

As to your other question, the old rule of thumb used to be that if you made one extra mortgage payment per year on a 30 year loan, you would reduce your loan to 20 years and save 10 years worth of interest. Your regular monthly payments will not be reduced as DVMMOM said because your payment is set by contract, as is the number of months. But your balance will continue to decrease.

In addition to what was mentioned about the interest you won't be paying on that $10,000 in the future, like Brandi mentioned...you paid $10k towards the principal. Your regular monthly payments (you said of $1,000) do not all apply to the principal. Some goes to principal, some goes to interest, and some (depending on your particular mortgage) may go to an escrow account that pays out your homeowner's insurance and/or flood insurance premiums each year. So, ten $1,000 "regular" payments is only (estimate here) ten $400 payments towards your principal (i.e, $4,000). Not $10,000. There is a huge difference between $10,000 and $4,000. Right?

If you continue to pay all your regular payments as scheduled, at the original rates, you can just pull up a mortgage amortization schedule to find out how soon you can have it paid off. Without knowing your interest rate and such, I can't tell you numbers specifically, but you can just plug the information into the calculator (see the link) and it will tell you.
http://www.hsh.com/calc-amort.html

AND, you still will have however many years/months that you are not paying any interest on that $10,000, that you otherwise would be.

It is my understanding, that at one time, if you paid one additional monthly payment each year, starting at the beginning of your mortgage (on a 30 year fixed) that you would pay the mortgage off approx 7 years earlier than scheduled. An "extra" payment being the ENTIRE monthly payment amount (applied to the principal), not just an additional principal payment.

ETA: Additionally, for every subsequent "regular" payment of $1,000 each month, a larger portion of THAT payment will go towards the principal, and a smaller portion will apply towards interest. So, for example if $350 went to Principal and $650 went towards interest, and you made a large principal payment (like you did)... your payments might now apply as $400 principal and $600 towards interest. Over time, this happens with every payment anyway...just in much smaller increments, so you may not notice it if you aren't looking. But with a $10,000 lump towards the principal, you should see a noticeable difference in how each regular payment is applied.

You are both right. You can make a huge payment and make no payments until payments are due. Still a better analogy to what you did is you made your last ten payments ahead of time and by doing so it actually counted as your last say 15+ payments because you won't be paying interest on that principal that no longer exists.

If you give me all the variables I could tell you exactly what you shaved off but not knowing I ball parked it at 15+

I have yet to see a mortgage other than an ARM that allows you to re-amortize your loan so don't expect a change in payments without refinancing.

You still have that amt of time because that is the duration in which you have signed the contract and the duration you have to pay it off, so next month you will see a principal balance, your actual balance (w/interest), payment and 16yrs 8months remaining depending on what your lender shows on your mortgage note monthly. You are making a good choice with paying directly to the principal in addition as another poster suggested you should confirm there is no pre payment penalty, many lenders do this to ensure they get their full payment of interest and keep very good records of all your payments/contracts. I only worked in processing for a short time on mortgage loans, but did work in commercial collections on large items for a while and principal payments were always a question because different lenders had different rules in regards to it.

Oh Geez! Good you understand this. Your friend's ignorance is the start of why some people are losing their homes. Hope he listens to YOU if he's ever offered an Interest only loan. Others have given you direction to how to figure this out and put it on paper to explain but glad you get it and you are a SMART one about it.

The more you pay in one lump sum at one time, the less that is remaining on the loan (the principal) and accumulating interest. At least, that is the way it would seem to me. Your statement may still say you have 16 years and 9 months left on the loan, but I would think your monthly payments have been reduced.

This is in response to the people that may not realize that if a person has a mortgage with BOA, as I do, that there is the option at anytime to apply any amount to Principle only online. We do that & it still shows the payoff date as the original payoff date, even though we can look at our mortgage schedule online & see that yes our money did go entirely to principle, & the mortgage balance also reflects that. I just think that BOA doesn't take the time to change the original payoff dates.

Tell him that instead of paying interest on $66k you are now paying interest on $56k. this will save you thousands of dollars later on. You should call your bank to be sure that this will be adjusted to your account.

As for you loan the amount of time will show the same, your future payments may adjust (that’s why you should call). The only time the amount of time would change is if you refinance for a shorter term. This too would save you thousands in interest.

Most often when you have a 30 year mortgage you end up paying twice (or more) of the original purchase price in interest.

All I know is per my loan officer, if take your monthly payment and divide it by 12, pay this amount more per month and you will knock off 15 years of your loan. For example, $1,000 mortgage payment divided by 12 equales $83. So if you pay $1,083 per month and the $83 goes towards your principle, you should be able to knock off 1/2 your loan. And the more you pay to the principle per month is that much less interest you are incruing. I don't know if this helps much, but this is what I was always told.

Here's a link to a mortgage calculator. These are fun, you can figure exactly what you'll owe no matter what you pay each month or year. THere are financial calculators all over the internet, compound interest, retirement saving, college and dept. There great, you can put in your numbers and plan your life.
Maybe if you SHOW your friend what you're doing he'll get it. I do have to wonder about this friends intelligence if he doesn't inherently get that paying down any loan more quickly will result in big savings in interest, just makes common sense right?

Go online to your mortgage account and look at the amortization of the loan. There you will see how every payment is applied towards principal and interest. After you make the $10,000 principal payment you should see the amount applied towards interest decrease and the amount towards principal increase.

Depending on the site, it might have a calculator that will determine how many months/years you have left to go. Or even the amortization might automatically adjust.

I know you've already figured this out, but wanted to mention this might be the time to re-fi.

I also know that making O. extra payment per year (either 1/12th each month added to the principal or a 13th payment every year), you will shave 10 years ff of a 30 year mortgage. So the 30 yr. would be paid off in full in 20.

We did that for awhile, then re-fi'd to a 15 yr. fixed, then paid it off when we were able to.

FIRST, tell BofA that the $10K is a principal only payment, other wise they will take principal and interest out of it. Then you haven't really accomplished anything.

When I first got the $90K loan on my home, my first principal payment was $20.56. The other $180.00 was all interest. When my wife and I got our income tax refund, we put the entire amount on principal. That was the equivilent of 40 or 41 principal payments. How do you find out how many payments you save?. Look at your amoritization schedule. Find out where you were when you paid the $10 K. Then subtract the principal you are paying each month from the $10K. (Each month the principal will be a little higher and the interest part a little lower.) When you get down to $0, you can add up the number of months you have cut off your mortgage.

If BofA said the length of your loan hasn't changed, then they need to refigure and you need to make sure they applied it to principal only.

Good luck to you and yours.

Isn't it the principle behind compounding interest? I.e., you will pay less interest because you cut your principal amount owed.

All other things being equal, it costs me more to borrow $65K than $55K, right?

I would make sure I didn't have a pre-payment penalty.

Way to go making a big payment like that - great job! Maybe your friend just wants to rationalize his own choices.

Did your payment specify apply to principal? If so, there you go. Otherwise your friend may be right.

It sounds like you need to make a call to BOA and ask them where your money was applied and tell them your intention.

I make online payments to my second. No matter what amount, it is applied toward the next installment and will reflect a new due date of a future month. Two 1/2 payments in one month will make my interest lower. So if the next due date is April 25 and I make a half payment on April 12 and then another half payment on April 25, I have fulfilled my payment obligation and reduced my interest because my TIME factor was smaller.

If I want to pay toward principal, I send a separate check with principal payment noted on the check.

Call the bank and ask how they want the payment noted.

If you receive monthly statements it should give a breakdown of how your montly payment is being applied (xx to principal, xx to escrow, xx to interest). The amount that now goes to interest will be much less.

A., you have lots of good responses. If your friend doesn't get it now, the next time the discussion comes up, just say "table that, until you understand" smile and change the subjet. The second thing is make sure you specified to BOA that it was for principal. If you paid it online, it didn't all go to principal because the computers get it and apply it as regular payments with interest, etc. That could be why it still shows as the same time frame for pay off. You have to mail it in and specify principal for it to apply. Call and verify, if they didn't apply it correctly get busy straightening it out. I had to do it and you wouldn't believe how long it took. Then I had them send me a letter stating it was applied correctly, with the right balances. I kept everyone's name and the date I spoke with them logged. fyi...I finally got a savy enough customer service rep who explained that all automated/online payments are applied by the computer and the computer doesn't know you want it applied as principal. That's a smart thing to do, congrats!

A., you are planning on continuing to pay the same $1000 a month on your payments, right?

Dawn