How does paying extra on my house payment affect my principal and interest?

It lowers your principal and thereby the amount you pay out in interest, but it won’t affect your contractual interest rate. Paying down a mortgage early is an excellent idea. Many people with 30 year mortgages pay them off in 15 years. Paying down your mortgage when you’re young and at the height of your income producing years is a godsend when you’re older. Eliminating your largest monthly cash outlay will free you up to do things others can’t when you’re older, like sailing the Caribbean, or traveling in Europe or Asia. And you’ll always have a home to come to when you’re done.

Yeah. To bad I’m not young and shit keeps blowing up in my face.

Hang in there. If you can pay more than $150 this month do it, to save some of the headway you made. If your monthly payments are on the original mortgage and not the marriage of the original and a refinancing, you might want to consider using your equity to downsize into another property with more manageable payments.

I only had to pay $150 this month, basically using all of the reserve I’ve managed to gather by paying $1000 instead of my minimum of $950. So next month it’s back up to $950. Just scrambling to make it through this month.

If you’ve just been paying an additional $50 each month, without earmarking it “to principal”, then it appears that you have simply prepaid interest that you would have been paying this month. In effect, you did not make any gain, but instead gave the mortgage company advance payments on what you would have already been paying this month. In short: no real gain / no lessening of the mortgage amount.

If you had stated on your payments that the additional $50 per month was “to pay down principal”, then you would have been lowering your amount owed and next year, when your payments are refigured, your monthly payments would have been reduced somewhat to account for the lowered balance owing. Without that statement, I believe that the mortgage company is entitled to treat your additional payment as “advances on regular payment schedule”, and not a reduction in principal. (Which actually saves you this month from having to default, but doesn’t reduce your level of indebtedness.)

From what she told me, any extra automatically goes to principal, not interest, unless you specify you want it to go to interest.

I guess what I’m trying to figure out is if I do this, where do they get their interest from?

I don’t think it reduces the interest monthly but shortens the pay-out time but I may be wrong.

But if I’m sitting on a credit, and keep making payments of $1000, then my credit goes up by $1000 a month PLUS, since it’s all “extra” all those $1000 payments go to the principal. That’s what my understanding was. Or….maybe I just need to think about it more.

It’s not a credit if it’s applied to the principal. I guess it’s good for you in the short run if they are letting you take the money that had been applied to the principal and use it to pay this months mortgage, but in the long run you are getting screwed. They got to hold your thousand dollars and not reduce your principal or pay you a dime in interest. I would still get something in writing that they are agreeing to do this. In the past I have heard horror stories where people made an arrangement like this then were charged late fees and the snowball to foreclosure started because they couldn’t catch up.

What are they doing with my thousand dollars, then @Judi?

As I understand it from your description, you were only paying $50 over your principal and interest payment of $950, right?

It worked like this:

First minimum payment $950 – Jan.
I paid $1000.
This left a “balance” (for lack of a better term)of $900.

Following month, therefore, my minimum payment was $900 – Feb
Paid $1000
Left a balance of $800.

Following month, therefore, my minimum payment was $800 – March
Paid $1000.
Left a balance of $600.

Min payment was then $600 – April
Paid $1000
Balance $400.

Min payment $400 – May
Paid $1000
Balance of -$600.

But that’s assuming just principal and no interest. After interest of $750 (? Check my math) my “balance” was really $150. That’s all I had to pay and still stay current.

I think they readjust the math when you decide to take that money as a credit instead of principal reduction.

But what if I never take the money again? What if I just keep paying $1000 a month even if I’m sitting on a “credit” of $5000, then $6000, then $7000? (not including interest.)

Then your principal will be reduced and the math will be calculated to reflect that.

I’m still trying to figure out how in the long run I’m getting screwed….?

To answer this question properly, I think that we need to know the interest rate, how often it is compounded, and the initial cost.

Geez. I’m a bad person! I don’t even know.

Sounds like you have just been paying ahead of time, not paying towards your principal. Paying down your principal does not lower your monthly payment unless you have some new type of mortgage I have never heard of. Paying down the principal will shorten the length of the loan and in turn that reduces the total interest you will pay.

At any time you can look at the balance you owe in principal to figure out how much you still need to pay in principal. This would be your balance to pay off the loan.

You can use an interest calculator that will show you how much interest and principal you are paying with each payment if it doesn’t tell you on your bills.

I never pay extra, I just save save save the money and when I can pay it off in full I do. I’m not saying it is the better way, I am just sharing what I do. I don’t pay it off until I feel like I will have plenty of saving even after paying it off. In the mean time I have savings to fall back on until I am ready.

It only lowered my monthly payment temporarily. Next month I’ll be back to the $950. I could, conceivably, get months and months ahead (lets say 12 months) and at that point, if I REALLY had to, I could go months and months (12 of them) and not pay anything until that “reserve” was used up. Of course the interest would still accrue so that would not be good.

With the first house we bought I paid ahead every month, and then, during the summer, we could skip a payement and use it for vacation. Now I wish I hadn’t done it that way, but such is life.

@Dutchess_III You would make more money just keeping the money in the bank and earning whatever low percentage banks are giving now. The way you do it, all you are doing is giving the mortgage company money to hold. You can hold the money yourself.

I understand that, but it just doesn’t happen that way. I wind up with $1000 in some account…..and something comes up and it gets spent. And if I put my foot down and say “No we are not spending that money,” a retarded marital arguments breaks out.
We don’t have huge reserves. This is kind of a “I don’t even know I’m doing this, and neither does Rick” kind of thing.

So – why are you not getting the idea that you should mark the extra as a “pay down the principal” amount if that’s what you want to do? You seem to be spinning in the same circle.

@Dutchess_III Fair enough. If this works for you then I am not going to say do it differently, just offering information.

Meanwhile, it does not sound like you are paying down your principal unless the mortgage company is reducing your principal and then you have the option to reverse it or something? I am not sure what they are doing.

@cwotus and @jleslie are correct.

I guess I better check with them @JLeslie.

@tedibear @CWOTUS said, “f you’ve just been paying an additional $50 each month, without earmarking it “to principal”, then it appears that you have simply prepaid interest that you would have been paying this month. In effect, you did not make any gain, but instead gave the mortgage company advance payments on what you would have already been paying this month. In short: no real gain / no lessening of the mortgage amount.”

The folks at the mortgage company told me it was going toward the principal automatically. The only way it would go toward the interest is if I earmarked it to go toward interest.

I’ll set aside some time tomorrow to call them.

Ask them to show you a printed, detailed history of how the payments have been applied. If your payments have only been reducing the next monthly payment, then I don’t think they are also reducing your principal.
Disclaimer: I’m just home from work and have a toothache. My head may be muddled.

Awwww…... :( I’ll do that @tedibear. Tomorrow.

If the excess monthly payments were being applied to principal – which is certainly not uncommon – then it’s doubtful that you would receive any kind of automatic forgiveness on a short payment. That’s why it seems from your description of the actions that have occurred (not what you say that people have told you) that the excess monthly amounts were simply accrued to payments not yet made, which is why you’ve now got a one-month “short payment” sort-of grace. Had the payments been applied to the principal (irrevocably), then you’d have no moratorium on the regular monthly payment. (It’s possible, I suppose, that the excess amounts were somehow accrued in escrow to apply toward principal at the end of the year or at some other point, but have now been redirected – at your wish – to create this “payment holiday”. That seems to me the most likely reconciliation between what you’ve been told and what is actually happening.)

Of course, it’s also possible that you’ve got a loan that allows you to pay “interest only” for some period of time – some mortgage contracts are written that way – but in that case your interest amount would be more than $150 out of a $950 monthly payment in the early years of a long term mortgage.

@CWOTUS thanks. I’ll be checking today. I didn’t speak to anyone about where I wanted the payments to be applied. I just started paying a flat $1000. When I talked to them yesterday, though, I did ask where the extra went, and she said they automatically go toward the principal unless I specify otherwise.

Now you guys have me really curious!

Requested the info. It’ll be a month she said.

She couldn’t give me much info, but she said that by making that partial payment they just reversed what I had paid extra on the principal, so I’m no further ahead than I would have been had I been making straight monthly payments all along. But that’s OK.

Interest is 7.125. She said the amount is based on the principal balance.

She didn’t quite understand my question on how often it’s compounded (I don’t really understand it myself,) but she said it’s amortized.

You’re paying 7.125%????! You’re being robbed. Can you refinance?

@Dutchess_III That they are willing to “reverse” it is actually a nice feature. Although, I question whether this woman knows what she is talking about, because interest rates are usually based on your credit score and then tied to some sort of measure like the prime rate or can be some other market rate. @Judi is right your interest rate is very high. You might want to see about refinancing. My FIL did it a few months ago. His was just over 7% also and now he gets just over 4%. It lowered his payment a ton (his loan is pretty big) and he will save some money overall once it is paid off even with the fees. Most important for him was the monthly payment, he couldn’t afford it anymore.

I bought the house in 1999.

I will look into refinancing, guys.

1999. Look into a 15 year loan if you refinance. You can get below 4% probably. You’ve owned it so long your payments have a lot going to the principal already. You already paid a good portion of the interest.