For those who try to prepay their mortgages, here’s a cautionary tale from reader RM. Basically every single time that he’s prepaid his mortgage, there’s been a big problem. The bank keeps applying it to the future interest instead of the existing principal. The future interest is calculated based on the current principal, so that means they’re having him paying extra interest that would have never accrued if they had subtracted his payment correctly!
By the way, publishing sibling Consumer Reports ran a few statistical models and found that you’re probably better off financially putting extra money in a mutual fund than prepaying a mortgage.
But, if prepaying gives you peace of mind and investing in your emotional satisfaction is more important than the financial benefit, go for it. It’s kind of like a conservative investment. Just keep RM’s story in mind. He writes:
I have had a mortgage with Chase for nearly 4 and a half years. In that time, I have been able to cut the principle owed by more than half by paying a little extra each month with sporadic larger lump sums as I am able. The extra amount was always applied to the principle until I made an extra $20,000 principle payment last year, paid at the same time as my usual principle and interest payment. Inexplicably, Chase decided to apply nearly $2000 of the extra payment to principle and interest for following month (due date 34 days away). The interest calculated into that extra payment was calculated without the extra $20,000 removed from the principle.Fortunately, they reversed the funds when I called them on it and the $20,000 was appropriately applied entirely to the principle. The amount of interest initially paid as part of the extra monthly payment was $1368.16. When I actually paid one month later (and interest had accrued on my principle, now $20,000 lower), the amount paid to interest was only $1,240.66. Had I not forced them to apply the extra payment completely to principle, Chase would have “earned” an extra $127.50 of pure profit.
Fast forward to more than a year later, when I was fortunate enough to be able to pay another $50,000 toward the principle. We made the payment of $50,000 plus the usual monthly payment 13 days early, figuring that 13 days of interest on $50,000 was worth saving. Today, I received the statement showing credit for an extra monthly payment (not due for 45 days), again effectively having me prepay a month’s worth of interest that would never otherwise accrue on that $50,000. The interest charged for the extra month was $1095.20. When I pay next month on a principle balance $50,000 smaller, the interest would be $779.90. Again, Chase tried to charge me an extra $315.30 interest on money that I no longer owed them.
Each time, Chase has been good about reversing the charges and applying the payments correctly. But I am certain that they are counting on most people to not realize that they are getting scammed out of a month’s worth of interest on the extra payment if some of it is applied to their next payment more than a month in advance.
This is pretty common occurrence with all kinds of loans, including student loans, so you better check your statements carefully after prepaying, and call the bank immediately if it looks like they applied your extra payment to future interest instead of paying down the principal.
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Chase, messing shit up again.
“We make you Chase your own money”
That’s their new motto.
This is nothing new, mortgage companies have been doing this since I first got a mortgage in ’91
If he has that kind of money to pre-pay, shouldn’t he do a reamortization? I’m sure there’s a reason not to, but I don’t know what it is.
Reason not to being A) current versus propsed interest rate and B) length you plan to stay in the home, paying closing costs for under 10 years is likely pointless.
A reamortization is not a refi.
Reamortizations only modify your monthly payments. There usually is a small fee for doing so, and as long as he’s happy with his monthly payments staying the same, there’s literally no reason to do it.
The one time you might want to is if you’re retiring and somehow had a huge chunk of change you could throw at your mortgage, and knew the monthly payments going forward would be difficult on your retirement income. Then maybe. But otherwise it’s just pointless. Reamortization doesn’t reduce the interest you pay, doesn’t reduce the principle, it just re-stretches out your loan till that 30 year mark if you’ve paid principle down to shrink the duration.
Why would you do that? Paying extra on principal reduces the ammount you owe on the loan without increasing the ammount of money you are REQUIRED to pay. Meaning you can toss some money at the mortgage here and there. If you reamoritize and increase the payment, then you are REQUIRED to pay that, no matter the circumstances…
Chrysler did this to me when I would make extra payments on my Jeep. They claimed that I am supposed to call them to tell them specifically to apply it to the principal.
Yes… that was almost certainly spelled out in your promissory note.
They are correct. USAA has told me I don’t need to tell them, but I still do – just out of habit from when my car loan was with HSBC.
I was told thru Wells Fargo on my particular loan, that they were only allowed by law to take out the interest accrued between the last date I paid, and the date I was paying. So if 25 days had lapsed, they could only calculate the per diem rate of let’s say $3/day, so only $75 of the entire payment could be interest. Anything after that automatically went to principle. And they were right, I’d check my statements regularly to find that is what they did.
The only time (they said) that I had to call ahead of time was if I was making a lump sum payment of like $1,000 or more to principal that was not part of a payment. Otherwise, I could throw $50-$100 onto my car loan every month if I wanted to.
Yup, we have a mortgage with Citibank that we just refinanced, and we’ve been thinking about trying to pay a little extra here and there to get it paid off a little bit early. We looked at our loan docs and they all say that any additional payments must be applied to principle and not interest (though I think there was some similar language about them being allowed to apply it to interest accrued only since the last payment that was made or something). But I would still make sure to call and/or document to make sure when makeing an additional payment.
We’ve also thought about doing the biweekly payment plan that the bank offers (where you pay half your payment every two weeks, so you effectively make one extra payment per year, thus paying off the loan earlier and saving a bunch of interest). Except there’s a fee for the program, a few hundred $ or so. Crazy, when I could just set this up via Citibank checking as an automated payment every 2 weeks if I wanted to, for free.
Prepaying: you get whatever your mortgage interest rate is back as a return.
Investing: you are at the liberty of the market.
I’d personally rather get a known 5% return than gamble on the market. However, either prepaying or investing is better than blowing it on crap you don’t need.
But I think the point is you don’t get 5%, you get something much lower.
Except real-estate itself is a market, and there is no guarantee that your home will be worth as much as the mortgage it took to buy it as many people have found out. Or that its worth it in the long-run with the interest tacked on.The capital ppreciation of the house may not be enough to offs
Yes, but if I’ve paid off the house, I then get to LIVE in it, no matter what it’s worth. (Assuming I can cover taxes and upkeep.)
Not everyone buys a house simply to resell it. There is a group of people who buy the house to have a permanent address for years and not be at the mercy of a landlord.
While the CR article was interesting, I tend to agree with you. The one thing that I would like to have been included in the article is more data in response to this statement:
“The index fund didn’t always win. In about a third of those 10-year periods, paying down the mortgage produced a better return. But it’s worth noting that when prepaying had the edge, it was a small one, ranging from a meager $1 to $2,799. When the fund beat out prepayment, it did so by $70 to $16,763″
What was the MEDIAN value that the fund beat out prepayment? CR provides the Average (mean) advantage, but it would be nice to know how likely you were to be able to collect on $16K vs $70
Don’t all banks do this? When I make a mortgage payment online, there are boxes which let me choose where any additional payments go. If I wrote a check, I think I’d have to include a note to ask them to apply it to principle (or maybe it’s on the payment coupon? I’ve never bothered to look).
Not my bank. I called up Wells Fargo and asked if I made extra payments if I should have to call them specifically, and they said no. Excess gets applied to the principal.
But after this, it makes you want to check.
I work for them a similar department. I back up what they said was correct but rarely there are times it does not apply correctly (usually Bill Pay or Western Union or a check mailed to us without the corresponding payment stub to specify where to go). A simple call fixes it and backdates to the appropriate time the payment was made.
Computers aren’t perfect and neither is the logic behind application of payments. But that’s why people like me have a job to fix those (among the other interesting things out there….)
My coupons have an itemized list; put $X towards scheduled payment, $Y towards prepayment of principal, $Z total. I typically don’t use the coupons (online bill-pay through a different bank), but if I prepay principal I suspect the paperwork will help them keep it straight.
my credit union automatically applies it to my mortgage principal… yay!
I use Suntrust and I have to specify through the online prompt where the extra money goes. I also make a point of saving my amortization statement every month–just so I can make sure they are behaving themselves.
I had the same problem with a car loan. I realized that my payment due date kept being pushed back, so I just saved the money up and paid it off in a lump sum. Obviously that’s a bit tougher with a mortgage.
Sounds like this shoud be a class action lawsuit. Mistakes happen but for them to continue to happen is wrong and they should be punished.
This particular method of applying payments is not a mistake: it’s both standard and spelled out in loan documents.
then why did they change it once he called? If it’s standard and in the loan documents then that’s the answer he should have received.
Usually, the loan docs say something to the effect of “add’l payments will be applied to future interest unless you tell us specifically to apply it to principal.”
Jesus, those two payments wouldv’e paid for my home. And he’s worried about the $127.50. I guess it’s the principle.
I thought it was the interest.
lol, I know! I was thinking, “Where the hell does he live?! He pumped 70 thou into it and that wasn’t a huge dent?!”
Then how about sending me a check for $127.50. TIA
Really, it’s not that expensive. Sounds like he’s been able to knock down the principal by about $80-100k, and that’s cut it by half. Implies a mortgage of
My mort. company is even worse. They take my overpayments and place them into a separate escrow account instead of applying it to ANYTHING. Since they are back water, and I pay using bill pay online at my bank, I have to call them everymonth to get the extra applied to principal
my lender used to mistakenly apply my extra principal to my payment BEFORE the current payment was applied. This had the nice effect of making my current payment be more principal and less interest. It wasn’t much difference, but it went on for years that way and I pretty much always sent along extra money. Eventually they caught on and changed it.
B of A applied my escrow payment to my mortgage, then started complaining that my escrow account is short.
Every mortgage I’ve had has had some way to indicate that extra money should be applied to principal–a box to check for an online payment, or a line on a paper payment coupon. Is Chase ignoring specific instructions to apply an extra payment to principal, or are they just chosing the most advantageous (to them) application for a random chunk of money you send their way?
As for balancing the security of paying down a mortgage and the better but riskier returns of a mutual fund: I used to put 80% of my savings in mutual funds and 20% in extra mortgage principal. Now that my mortgage interest rate is lower (making it comparatively an even suckier investment) I put 10 or 15% in the mortgage, rest mutual funds.
This is why I also put a memo note “for principle payment only”. I figure it will give me something to fight with if they ever try to pull this on me.
principal
Thank you! I hate to be the grammar police but this misuse is making me irritable!! Principle- a value or moral standing. Principal – capital investment or headmaster
I write them a letter with “PRINCIPAL ONLY” written at the top of the letter, in the letter, on the check, and lately I’ve even been putting a post-it as well on the check. And still about half the time, they process it as a payment (the principal only check is large enough to be a monthly payment). But I’m used to it and always check a few days later, and they fix it right away when I call. However, I’ve had this issue with all 3 of my mortgage companies, so it’s not limited to just one.
I don’t know if I’ve been lucky, but with every loan I’ve ever had except for my first ever, additional payments have always automatically been applied to principal. The includes four Chase second mortgages.
I currently pay a lot more than my minimum on my first mortgage (Wells-Fargo), mostly because I’m too lazy to open statements, and often not even home for months at a time. So I pay extra because the escrow payment historically has always gone up, and I can set up an automatic payment, and never have to worry that they’re going to foreclose because I was 50¢ short. Of course now that property values are way down, so is my property tax. The result is my escrow payment is a lot smaller, and so the overpayment on my principal is a lot higher than it was historically.
I’ve seen the advice not to prepay your mortgage for years. However, there is one big advantage to doing so… if I take a big hit to my cashflow (i.e. unemployment, decimated retirement funds, whatever), if you own the house free and clear, it takes a much bigger financial shock to put me on the streets than if I had to make that mortgage payment every month.
Depends on what kind of hit. If you lose your job, you’ll probably be better off with money in mutual funds rather than in your home, because the mutual funds can be converted to real money faster and cheaper than your house can. You could actually lose your house because you put so much into prepayment that you have no liquid savings, then can’t make the reduced-but-not-zero mortgage payments after losing your job. Similarly, if you have unexpected large expenses like medical bills, selling mutual funds is simpler than getting a 2nd mortgage.
I hope people who aggressively pre-pay their mortgage keep enough liquid savings to get along for several months.
But if your retirement fund tanks then, yes, of course your retirement fund was the wrong place to put your money.
However, it’s easier to keep the utilities turned on and the taxman happy when you don’t have a mortgage to pay. And a lot of taxing entities will help you out if you’re in a bind and can’t pay your property taxes in one lump sum (Gotta make sure to talk to them before it gets delinquent though.)
Exactly. You can turn cash into home equity instantly (just pay down a part of the mortgage). Going the other way, however, is MUCH harder.
At least, if you’re going to be aggressively paying down your mortgage instead of saving in other ways, keep an unused HELOC line available for emergencies.
Another factor is that if you assume you will never file for bankruptcy, the “return” that you get from paying down your loans early can generally be regarded as risk-free return. For those not following, lets break it down this way:
If you pay an extra $1000 on your loan, which has an interest rate of 5%, you will save $50 (5% of 1000) of interest every year until your loan matures (along with any compounding effect). What this means, is that you are getting the same benefit of investing $1000 in an account that bears 5% interest (unheard of these days).
If you assume that you will never declare bankruptcy, this “return” is practically risk free, since there are no situations where you won’t have to pay the interest and principal on your loan.
Furthermore, once you pay off the loan early, your monthly obligations will go down, meaning this reduces your fixed expenses (and risk) once the loan is paid off.
Assuming you can’t get 5% risk free return, it’s always a better deal to pay off your loans (unless you are neutral to risk). Investing in stocks will net higher returns, but also come with additional risk.
Finally, for home mortgages and student loans, you have to back out your lost tax savings, which eats into your return.
Someone in America is paying their mortgage?
Actually, a lot of us are. We’re the ones who didn’t buy ARMs and were smart enough to wait until the housing crazy died down! Hell, my mortgage is less than I used to pay in rent.
I paid off a 30 year mortgage in 18 by making extra payments as often as I could. Those payments were to Bank of America. They got every extra payment right. No mistakes. Somehow they did it. This the only house I’ve ever bought so I didn’t know applying the extra payment to principle was such a problem. I must have got lucky. But I’ll take it.
Don’t forget we also did not buy into interest only loans with large balloon payments after several years, and we did not buy a home that was at the maximum the bank said we could afford.
So I guess all of the people who have done exactly those same things, but have lost their homes to foreclosure are just stupid.
This isn’t what you and other “good citizens” are saying exactly, but it presents itself that way.
The people who did things right and still lost their house: by definition had some other event impact their ability to pay. They are part of the very small minority of people who get screwed by the random events of life. Those foreclosures are the baseline rate. Everything above that rate is idiots and fraudsters.
Bad luck can happen to anyone. Be prepared for it as best you can.
Only a minority of mortgages are deliquent. The number of people falling behind is significant, but still an exception, not the rule. You just don’t read news stories about people who pay their bill as scheduled and don’t get forclosed on.
I have to say I’ve had exactly the opposite experience with my Chase CreditCard. Since I’m In process of paying off all the debt, I made an extra payment this month. When I checked the account to see if it posted, there was additional “INTEREST CHRG CREDIT ADJ(Other)” of few cents credited to my account. Maybe the CC people at Chase are better at this than the Mortgage side.
Yawn…another non-story. Banks have always done this, and the simplest thing to do is check the box that says APPLY TO PRINCIPLE
The answer here is simple: The “extra” payment was processed as the next month’s payment.
This happened to us with Wachovia years ago. When I saw it on the statement I was shocked until I found in the fine print something about electronic payments being applied in this way ( I was paying through BOA bill pay). Any paper checks or automatic payments set up through their bank would have the extra applied to the principle. I got on the phone and complained, they changed the past payments to principle and I set up automatic payments plus principle with them. Problem solved. Lesson learned: always check statements and read fine print.
Send the extra payment SEPARATELY, in a separate check.
And mark that extra check, clearly and unambiguously, as “APPLY DIRECTLY TO PRINCIPLE.”
Other than that, I have no advice.
I doubt it’s a teller doing it on purpose. When I was in banking, we were never trained to run an extra payment as principle only, even though there was a way to do it. My manager showed me how to do it so I was able to run it correctly, but most managers didn’t, and it wasn’t because they were trying to scam the customer – they just didn’t know. That brings up the other issue of totally inadequate training…
Definitely check all receipts.
Yup, my parents learned this the hard way as well on their mortgage. Always explicitly state that it’s going towards the principle when you want to pay extra. Bonus points for getting a receipt or something with it in writing. I do that every time I pay extra on my car loan, and always request a written receipt for it as paid to the principle so they can’t play games with me.
I’ve never had a problem marking extra princ. payments “Extra Princ. Payment”.
Don’t know why more don’t do it.
As far as mortgages go, it’s some of the cheapest money you’ll ever borrow. Paying it off early if you have other debts is stupid. Also as soon as you own it, you lose the tax deduction. Pay off everything else first, then comfortably finish off your mortgage.
My credit line is now with Chase since they acquired my bank. I always make my extra payments in person with a separate check. I tell them that it is for principle only (they seem to always ask at my branch). My minimum payment is done automatically.
The “personal bankers” there have a love/hate relationship with me – I’m pretty easygoing and I don’t blame them for corporate mistakes and policies. But, I will point out the flaws in their marketing pitch. Also, when I discuss the products with them I get the full disclosure (not the sales brochure summary) and read it. Then I come back and point out the “surprises” in the fine print and explain why I won’t agree to it – usually, their product training didn’t cover those questions.
I’m in the process of moving a business account from Chase to another bank and I let the branch manager know why (mostly the new fees, plus another convenience issue due to their branch locations was no longer important to me.) They said that I’m a good customer and they can set it up so I don’t have to pay the fees – when I sat down to do it, their solution is for me to move my retirement accounts to Chase so I would qualify for free personal and business checking. No Thanks – My new bank coded my account to eliminate the fees without demanding anything more than my wanting to move the account to them – Chase wouldn’t do it to keep me.
SOP. The lender doesn’t want you paying the debt off early. They want it on the exact terms specified, so they can collect every dime of interest they can.
No no no! Don’t wait until AFTER you make the extra principle payment! Holy crap, really? You call before you make the payment and find out what you need to do to have the payment applied properly. I wanted to make an extra car payment and found out that had I mailed it in and just marked the check as an additional principle payment, they would have applied it as a payment because I need to be 90 days AHEAD in my payments in order to make extra payments.
Banks don’t want you to pay it off early and they’ll do everything they can do to prevent you from doing it. However, if you contact them first you can avoid the headaches you’ll have if you wait till afterward to have your WTF moment.
This is very typical of Chase.
To the point that when our mortgage was with Chase, we started to assume it was in their handbook. “Always apply payments to future interest first, just in case the customer doesn’t notice it!”
Huh. I would’ve thought Consumerist readers on average would know how to spell “principal,” but it would appear not. Interesting.
When I had a loan on my Ford Focus through Ford Motor Credit, the way they worked it was that any overpayment was held in escrow to cover future payments, thus reducing the amount due on the subsequent payment. If I remitted payment in excess of the amount due the following month, then the excess paid the previous month was applied to principal, else it was applied to the payment due that next month. I got to a point where my payment due was $0, but I kept making my normal payment, which would ultimately be applied to principal.
chase = citccorp = bank of america = evil
How many times do I have to tell you??
Trust NO ONE at these companies at any level.
The deception is built into the system.
How do you think all the big banks are making record-breaking profits anyway?
All those little 125.70 and 315.78 and 25.78 dollars amounts times millions of
accounts plus other evil shenanigans that they do to us and their own people
are the way it all adds up.
Find a credit union FAST.
Wachovia did this with my auto loan. I had to phone them every month and have them redo the interest and payments. Numerous letters were written to the attorney general, Wachovia president, etc but they were ignored. The CSRs always said I should put something on my check, so I asked them to look at the checks since I had been putting “apply excess towards principle” since originating the loan.
I’m so happy to be done with them.
BANKS like to try to get away with under handed tactics & will even in some cases commit criminal acts IMO such as breaking in property they have no right to & foreclosing,
The only way BANKS will change is to start penalizing them & their grossly overpaid top executives.
Good to know, they carry my mortgage and I plan to start paying extra.
… And if you think THAT’s FUBAR, have you ever tried to pay down principal on a student loan? They make you jump through several hoops – they don’t WANT you to do it, so they make it nearly impossible.
Hmm. Chase. Doesn’t surprise me. Took me 2 years, about 12 phone calls, multiple faxes, website messages, etc, to get them to fix a stupid error on their part. Very aggravating process.
That said, I do make extra principal payments to them online and so far there haven’t been any problems. I am careful to time them away from my regular payments and not make any between the 1st and when my standard payment. Still, will keep an extra close eye on future ones because I’m sure they will mess it up if they can.
I pay extra every month on my student loan with Sallie Mae. A few days ago, I went online to check when they posted my payment and noted that every single month they apply a different amount to the principle and interest. I always pay extra, usually $50-75 more. One month, only .98 cents went toward the principle and 310 went toward interest.
I put off calling because I always get stuck w/ a foreign accented fella named Mark or Greg and I ended going crazy because I don’t understand what they’re saying. They’ll put me on hold and, after 20 minutes, I get hung up on or I do it.
My student loan is through Direct Loans. My loan is $146 a month,and I put $175 on. I guess I should check where that extra $29 is going.
According to Direct Loans Servicing, any monies paid over the required payment automatically gets put towards the principle of the loan.
I am paying my mortgage per month and most of the payment is being applied to the interest(8.7%) plus I am being charged deferred interest on the back end of the mortgage: Question…Can the mortgage company apply most of my payment to interest and at the same time keep adding dererred interest on the back end of my principal balance? Should I contact the mortgage company (HSBC/Beneficial) and call this into question?
Thanks,
Frankie