Must a Mortgage Payment Be Made Every Single Month (if Paid Ahead)

[Harold99]

I have a mortgage and credit card loan, and had a car loan all through large local banks. They were written differently. The mortgage and credit card required that a minimum payment be made each month regardless of overpayment. The car loan was different in that when I overpaid it, the next payment was not due until months later. At the end of that loan the next payment was not due until a year and a half later. So, these loans were obviously written differently.

You should contact the lawyer that wrote the contract. But the question is, if your lawyer neglected to include this specific language in the contract, which of the two above scenarios does the contract default to?

[adjusterjack]

Any excess payments in a regular payment only reduces the principal at the back end of the loan. Meaning that the credit to interest will only be reduced (each month) based on the principal balance for that month. The principal balance does not change no matter how much they pay and the principal is reduced by the excess money over the monthly payment at the end of the loan. But each monthly payment is based on the front end of the schedule.

You can take a 30 year mortgage and pay it off in 15 years by paying your monthly payment (principal and interest) and adding the next month's principal amount to the payment. You don't get charged interest for that next payment because you already paid it. You skip the next line on the schedule.

I'm sure I confused you.

I'm sure you have. LOL.

I'll provide an example using a loan amount of 33,251.61 for 8 years (96 months) at 6% to get payments of 437.00 per month. I'm only showing the first 9 payment to illustrate.

Principal Int Principal Balance
1 270.73 166.27 32,982.88
2 272.09 164.91 32,710.79
3 273.45 163.55 32,437.34
4 274.81 162.19 32,162.53
5 276.19 160.81 31,886.34
6 277.57 159.43 31,608.77
7 278.96 158.04 31,329.81
8 280.35 156.65 31,049.46
9 281.75 155.25 30,767.71

Instead of 437.00 per month, the borrower pays 450.00 per month from the getgo.

Principal Int Principal Balance
1 283.73 166.27 32,969.88
2 285.15 164.85 32,684.73
3 286.58 163.42 32,398.15
4 288.01 161.99 32,110.14
5 289.45 160.55 31,820.69
6 290.90 159.10 31,529.79
7 292.35 157.65 31,237.44
8 293.81 156.19 30,943.63
9 295.28 154.72 30,648.35

There's a notable difference in the reduction of principal each month.

Now let's say that in the 5th month you get a double payment 900.00.

Line 5 becomes:

Principal Int Principal Balance
5 739.45 160.55 31,370.69

Ensuing months are resumed at 450.00 per month.

Principal Int Principal Balance
6 283.10 156.85 31,087.59
7 284.51 155.44 30,803.08
8 285.93 154.02 30,517.15
9 287.36 152.59 30,229.79

Continuing to pay 450.00 per month pays the loan off 5 months early. This is not the same as applying payments to the end of the loan. The payments get applied when they are received. This is how loan amortization works and you might as well get used to making the adjustments and documenting them.

Throw in a few more double payments and the principal reduces more and the loan is paid off sooner.

You can play around with this amortization calculator:

http://www.bretwhissel.net/cgi-bin/amortize

[budwad]

I'm sure you have. LOL.


Continuing to pay 450.00 per month pays the loan off 5 months early. This is not the same as applying payments to the end of the loan. The payments get applied when they are received. This is how loan amortization works and you might as well get used to making the adjustments and documenting them.

I only disagree with the bolding. Although the actual principal balance is reduced the monthly payments (interest and principal) don't change until there is a payoff at the end of the loan.

[Taxing Matters]

I only disagree with the bolding. Although the actual principal balance is reduced the monthly payments (interest and principal) don't change until there is a payoff at the end of the loan.

I agree. When the prepayments are applied starting with the final payment due under the contract that is indeed the case. However, while the monthly payments are still due each month and do not change, the principal reduction does affect how much of each payment ends up allocated to interest, as I think you touched on before. So the OP has to be careful in computing the interest when prepayments are made as it will differ from the standard amortization table that assumes all payments are made on time and assumes no prepayments.

[adjusterjack]

I only disagree with the bolding. Although the actual principal balance is reduced the monthly payments (interest and principal) don't change until there is a payoff at the end of the loan.

That's right. But my take away from the OP's post was something like this. "Buyer we are coming to the end of the loan, you have ten payments left totaling $4500. You've given me 5 extra payments of $450 each during the life of the loan which I am applying now, so you only owe me 5 payments of $450 each instead of 10." Or something like that.

Which results in the buyer paying more interest through the life of the loan than he should have.

[LG357]

Man, you guys are assuming WAY too much. You have ENTIRELY misinterpreted my last reply. I don't need a math lesson, and it's incredibly rude to assume I do. I tried responding to adjusterjack last night, but for some reason it tells me it will not post without moderator approval, and they never did that for no apparent reason. (Didn't do that when I signed up!) Not going to bother writing the same thing again. I have not broken any rules, and I was much more more polite than I wanted to be....

I'm going to apply all of their payments per the wording of the contract, and I don't need you to tell me how to do it. When this months check comes, I will apply it as written, and even though the buyer thinks it's 2 months I'm not going to say anything at all until it is late again next month. The exact numbers are NOT important right now, it will not effect how much they send me, and it will not be paid off for numerous years. (I expect foreclosure to be more likely) And I don't have to deal with the tax man until next year. All information about payments is recorded, it's not like I'm missing any information or can't rearrange it in any way I see fit. I use my own accounting methods, if they differ from other people I don't really care so long as we end up at the same number.


And now this one posts just fine. Consider this conversation over.