mortgage prepayment


B

beliavsky

Interest rates on cash are so low that making a year's worth of
payments on my mortgage (15 year fixed at 5.5%) makes sense, but I
think the way fixed rate mortgages work is that making large payments
reduces the number of future monthly payments to be made but does not
permit you to skip payments. So I would not be able to skip making
payments for a year.

I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
falling behind the amortization schedule). This would be different
from the option adjustable rate mortgages that allow borrowers to fall
behind the schedule of equivalent amortizing adjustable rate
mortgages.
 
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I

Igor Chudov

Interest rates on cash are so low that making a year's worth of
payments on my mortgage (15 year fixed at 5.5%) makes sense, but I
think the way fixed rate mortgages work is that making large payments
reduces the number of future monthly payments to be made but does not
permit you to skip payments. So I would not be able to skip making
payments for a year.
correct

I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
falling behind the amortization schedule). This would be different
from the option adjustable rate mortgages that allow borrowers to fall
behind the schedule of equivalent amortizing adjustable rate
mortgages.
Even if someone ofered such a service, they would be unlikely to offer
you a better rate than the one you would earn at your own bank.
--
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from Google Groups. If you want your postings to be seen by
more readers you will need to find a different means of
posting on Usenet.
http://improve-usenet.org/
 
A

Avrum Lapin

Interest rates on cash are so low that making a year's worth of
payments on my mortgage (15 year fixed at 5.5%) makes sense, but I
think the way fixed rate mortgages work is that making large payments
reduces the number of future monthly payments to be made but does not
permit you to skip payments. So I would not be able to skip making
payments for a year.

I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
falling behind the amortization schedule). This would be different
from the option adjustable rate mortgages that allow borrowers to fall
behind the schedule of equivalent amortizing adjustable rate
mortgages.
My recollection (late 1980's) was that "extra payments" go to reducing
the principal. For "normal" payments, the part allocated to interest is
based on the outstanding principal, the rest of the payment is applied
to the principal.

My 1971 30 year mortgage, from what was a S&L, had a 29 year
amortization schedule so that if you missed a payment, the mortgage
could still be paid off in the maximum (by law?) 30 year period without
a need to do what today is called a re-fi.
 
J

JoeTaxpayer

I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
falling behind the amortization schedule). This would be different
from the option adjustable rate mortgages that allow borrowers to fall
behind the schedule of equivalent amortizing adjustable rate
mortgages.
My bank (Citizens) offered a no-point no-closing "home equity loan" with
a fixed 15yr 5.24% amortization. It works as you are suggesting. If I
make 2 payments, the next due date moves out by 2, and the interest
accrues on a daily basis. Unlike a standard mortgage, where paying a few
days early or late does not impact the payoff, the daily accrual changes
that. With the same bank offering me a Prime minus 1-1/4 HELOC, I paid
the larger loan ahead by 12 months from the HELOC. If they freeze the
HELOC, I just will make the regular mortgage payments to the HELOC and
will still come out ahead. For a fraction of a percent this is a waste
of time, but for 2.5%, I'll play around.
Joe
 
B

BreadWithSpam

Interest rates on cash are so low that making a year's worth of
payments on my mortgage (15 year fixed at 5.5%) makes sense, but I
think the way fixed rate mortgages work is that making large payments
reduces the number of future monthly payments to be made but does not
permit you to skip payments. So I would not be able to skip making
payments for a year.
Correct. The term you're looking for is "curtailment" - the
remaining life of the mortgage is shortened, but the payments
do not change.
I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
I don't know of any that let you skip a payment. I do know
that some have in the past had an option to apply principal
in a way that lowered your mortgage (and monthly payment)
but left the term intact. You couldn't do so in the first
year or two of the mortgage, and you had to pay a fee of
some sort (a couple of hundred bucks, IIRC). But unlike
a curtailment, this kind of prepayment did affect what you
owed the next month.

In general, unless folks have a substantial emergency
cash fund handy - or they are about to pay it off *completely*,
I do not encourage prepayment of that mortgage. Money
used to prepay a mortgage is highly illiquid. And
nowadays, folks are coming to realize that having a
HELOC doesn't count for much as emergency liquidity,
as HELOCs are getting frozen all over the place.

When you need it, there's no substitute for cash. Home
equity (generated through prepayments or otherwise) certainly
is no substitute.
 
B

BreadWithSpam

Correct. The term you're looking for is "curtailment" - the
remaining life of the mortgage is shortened, but the payments
do not change.
One more thing about this - just to clarify - your payment
does not change, but come tax time, there is a potential
effect: less mortgage interest. If you prepay principal,
then each mortgage payment after that has more principal
and less interest than there would have been had you not
prepaid.

In reality, this effect is likely to be quite small unless
it is a very substantial prepayment, and not everyone even
itemizes in the first place. But it is something to keep in mind
and does speed up the day when your mortgage interest may
not be enough (in conjunction with other deductible items)
to justify itemizing.
 
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D

DA

DA had written this in response to
http://www.huntinvest.com/financial/mortgage-prepayment-12012-.htm :


-------------------------------------
Interest rates on cash are so low that making a year's worth of
payments on my mortgage (15 year fixed at 5.5%) makes sense, but I
think the way fixed rate mortgages work is that making large payments
reduces the number of future monthly payments to be made but does not
permit you to skip payments. So I would not be able to skip making
payments for a year.
I wonder if anyone offers amortizing mortgages where extra payments
allow the borrower to skip payments for a period of time (but not
falling behind the amortization schedule). This would be different
from the option adjustable rate mortgages that allow borrowers to fall
behind the schedule of equivalent amortizing adjustable rate
mortgages.
I also think that paying a part of that 5.5% mortgage would be a wisest
investment these days. I would be careful about assuming where the payment
will go though. In fact this past summer I did send Wells Fargo 2+ months
of mortgage payments assuming (don ask why) that the money would be
applied to the principal. I was trying to bring the principal up to above
20% to eliminate the PMI. However, what WF did is they paid themselves
twice first (as in taking interest as if it was TWO separate monthly
payments), then applied the difference to the principal which then kept it
still under 20% and I ended up paying for another month of PMI.
It got me little agitated because of that extra month of PMI but it did
have an effect that you might be seeking: the due date on my next bill was
two months out, so I could in fact skip the payment that was immediately
after the lump sum payment.

End of my 2c




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