Extra payment to prinicipal or interest>?

[PeterA007]

I get that this is super frustrating, and they're not doing anywhere near a good job helping you out. And I can understand digging in in this situation and considering at matter of fairness / justice / etc. All of that said, sometimes the best revenge is living well. Think what would be best for you personally going forward, considering the past is immutable.

This is literally one of the few cases where it is exceedingly trivial for the lender to own up to and fix its mistake. Roll everything back to a year ago, apply the extra payments correctly, and everything is adjusted to where it should.

Yes. I have researched this on the interweb and there are many examples where other banks (including prince of darkness arch evil mega banks) have just simply corrected this, and done so with a smile.

[Beensabu]

I just tried to make a payment via the'Pay down to $0' button.
It didn't even work! I couldnt input anything when trying to enter a custom number.

This is what it says above that window.
"Please note: Using the “Paydown to $0” option does not pay off your loan. Please contact us for your final payoff amount and to close your loan".
In the 'Amount' window for that button there is a shaded number which is the full loan balance.
That seems pretty clear that even if it was working, that button is meant to pay off the loan entirely.

It is good that you tried and have definitively ruled that out.

It sounds like you have four options remaining short of setting off down a righteous "warpath" for fun (and you do you, if that's what you want to do):

- reply back to the bank person and ask for specific instructions on how to ensure a future payment is applied to principal
- attempt a "regular" payment with a note, take a screenshot in case the note is not visible in your transaction history, see if it is applied towards principal according to your direction, and contact the bank if it is not
- go into a branch to make the payment with verbal direction and confirm appropriate application with documentation while there
- refinance your loan with another lender (unless it's the kind of loan you can just transfer w/o refinancing)

[#Cruncher]

We have been making extra payments each month on a mortgage. Our bank has been applying it to interest and zero to reducing principal. ... [Our bank says] it is all applied to interest and our next regular monthly payment isnt due until Oct 2025.

An extra payment can't be applied against interest. [*] It is either applied against the loan balance or it is not applied at all. It sounds like your bank is doing the latter. Instead of applying your extra payments against the loan balance when received, it is holding them and applying them the following month. If you repeatedly make extra payments, the end result is application of your extra payments is delayed further and further into the future. This is illustrated in the table below. It assumes

• A $139,581 loan balance September 2023.
• 6% interest and a $1,000 monthly payment needed to pay off the loan in 20 years. (Payment calculated with Excel PMT function.)
• Beginning October 2023 you made the regular $1,000 payment plus an extra $1,000 payment every month for 12 months to September 2024.
• Beginning October 2024 you make no payments at all for 12 months.
• Columns B & C assume the bank applies the total $2,000 payment every month as it's received.
• Columns D & E assume the bank applies only the regular $1,000 payment each month and delays the $1,000 extra until the following month. By September 2024, 12 extra payments have been delayed. The bank applies these each month October 2024 through September 2025.

Under these assumptions the loan balance September 2025 would be $131,137 if the bank applies each $2,000 payment as it's received. But it would be $131,898 or $761 more if the bank only applies $1,000 each month. This can be seen both in cells B9:B11 (using the Excel FV function) and in row 37 at the bottom of the table.

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Row             Col A      Col B  Col C      Col D  Col E   Col F   Formula in Column B (B13:B37 copied to D13:D37)
  2              Rate       6.0%
  3            Months        240
  4           Balance    139,581
  5   Regular payment   1,000.00                                   =PMT(B2/12,B3,-B4,0,0)
  6     Extra payment   1,000.00                                   =B5
  7    For nbr months         12
  8   Resume reg pmts      FALSE
  9  Bal  w extra pmt    131,137                                   =FV(B2/12,ROUND((B6/B5)*B7,0),IF(B8,B5,0),-FV(B2/12,B7,B5+B6,-B4,0),0)
 10  Bal wo extra pmt    131,898                                   =FV(B2/12,ROUND((1+B6/B5)*B7,0),B5,-B4,0)
 11        Difference        761                                   =B10-B9
                         Extra Applied     -- Delayed --
 12             Month    Balance   Pmt     Balance   Pmt     Diff

Code: Select all

 13          Sep-2023    139,581           139,581                 =$B4
 14          Oct-2023    138,279  2,000    139,279  1,000   1,000  =B13*(1+$B$2/12)-C14
 15          Nov-2023    136,970  2,000    138,975  1,000   2,005   | | |
 16          Dec-2023    135,655  2,000    138,670  1,000   3,015   | | |
 17          Jan-2024    134,333  2,000    138,364  1,000   4,030   | | |
 18          Feb-2024    133,005  2,000    138,055  1,000   5,050   | | |
 19          Mar-2024    131,670  2,000    137,746  1,000   6,076   | | |
 20          Apr-2024    130,328  2,000    137,434  1,000   7,106   | | |
 21          May-2024    128,980  2,000    137,122  1,000   8,141   | | |
 22          Jun-2024    127,625  2,000    136,807  1,000   9,182   | | |
 23          Jul-2024    126,263  2,000    136,491  1,000  10,228   | | |
 24          Aug-2024    124,894  2,000    136,174  1,000  11,279   | | |
 25          Sep-2024    123,519  2,000    135,854  1,000  12,336   | | |

 26          Oct-2024    124,136      0    135,534  1,000  11,397   | | |
 27          Nov-2024    124,757      0    135,211  1,000  10,454   | | |
 28          Dec-2024    125,381      0    134,887  1,000   9,507   | | |
 29          Jan-2025    126,008      0    134,562  1,000   8,554   | | |
 30          Feb-2025    126,638      0    134,235  1,000   7,597   | | |
 31          Mar-2025    127,271      0    133,906  1,000   6,635   | | |
 32          Apr-2025    127,907      0    133,575  1,000   5,668   | | |
 33          May-2025    128,547      0    133,243  1,000   4,696   | | |
 34          Jun-2025    129,190      0    132,909  1,000   3,720   | | |
 35          Jul-2025    129,836      0    132,574  1,000   2,738   | | |
 36          Aug-2025    130,485      0    132,237  1,000   1,752   v v v
 37          Sep-2025    131,137      0    131,898  1,000     761  =B36*(1+$B$2/12)-C37

* For example, in October 2023 in the illustration table, a regular $1,000 payment covers the $698 interest (139581 * 6% / 12) leaving $302 to be applied against the loan balance, reducing it to $139,279 (139581 - 302). There is no interest left for the extra payment to be applied against. If it is applied at all, it reduces the loan balance.

[PeterA007]

She told me verbally 'Pay down to $0' was a function to pay off the loan

It doesn't matter what she told you. When you click on the button, can you enter a custom amount?

We have reached a new understanding about the 'Paydown to $0 function' today :


Question to bank:
'Pay down to $0' feature
What is this option used for?
Car a partial principal only payment be made here?
I tried to use it but the window would not allow any input'.


Answer from bank:
'Questions about an existing loan
9/30/2024 - 8:25 AM
Good afternoon,
Thank you for your email. the pay down to zero only applied to lines of credit. To make a principal only payment you can just send us a message after making the payment to apply it to principal only'.


So the only way to make a loan payment at all is via the 'Regular Payment' button.

[PeterA007]

We have been making extra payments each month on a mortgage. Our bank has been applying it to interest and zero to reducing principal. ... [Our bank says] it is all applied to interest and our next regular monthly payment isnt due until Oct 2025.

An extra payment can't be applied against interest. [*] It is either applied against the loan balance or it is not applied at all. It sounds like your bank is doing the latter. Instead of applying your extra payments against the loan balance when received, it is holding them and applying them the following month. If you repeatedly make extra payments, the end result is application of your extra payments is delayed further and further into the future.
* For example, in October 2023 in the illustration table, a regular $1,000 payment covers the $698 interest (139581 * 6% / 12) leaving $302 to be applied against the loan balance, reducing it to $139,279 (139581 - 302). There is no interest left for the extra payment to be applied against. If it is applied at all, it reduces the loan balance.

So what would be the principal today if the extra payments were applied to principal only?

[JonFund]

My mortgage is with Wells Fargo, and you can make a "principal only" payment at any time, without penalty. I did make a regular extra payment once (principal and interest), however, when they issue the 1098 tax form at the end of the year, they specifically show only 12 months of interest paid. In other words, you can't deduct the additional interest paid for the year if you choose to itemize on your tax return.

[#Cruncher]

So what would be the principal today if the extra payments were applied to principal only?

The answer is in cell B25 of the illustrative table in my previous post: 12 monthly payments of $2,000 ($1,000 regular + $1,000 extra) reduce the balance from $139,581 in September 2023 to $123,519 in September 2024.

123,519 = 139581 * 1.005 ^ 12 - 2000 * (1.005 ^ 12 - 1) / 0.005 -- or with the FV function:
123,519 = FV(6%/12, 12, 2000, -139581, 0)

(Note: a 6% annual mortgage rate equals a 0.5% monthly rate.)

I did make a regular extra payment once (principal and interest), however, when they issue the 1098 tax form at the end of the year, they specifically show only 12 months of interest paid. In other words, you can't deduct the additional interest paid for the year if you choose to itemize on your tax return.

As I tried to explain in my previous post, an extra payment can only be applied against principal. The interest is covered by the regular payment. There is no "additional interest". If fact, with an extra payment there will be less interest for the year, not more.

Consider the following table. Columns B:D illustrate the case where only a regular $1,000 payment is made each month. Cell C17 shows the total interest for a year is $8,273. Columns E:G show the same thing except that an extra $1,000 payment is made the first month. Cell F17 shows the total interest for the year is less: only $8,217.

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Row     Col A    Col B Col C  Col D      Col E Col F  Col G
  2      Rate     6.0%
  3     Month  Balance   Int    Pmt    Balance   Int    Pmt

Code: Select all

  4  Dec-2023  139,581                 139,581
  5  Jan-2024  139,279   698  1,000    138,279   698  2,000
  6  Feb-2024  138,975   696  1,000    137,970   691  1,000
  7  Mar-2024  138,670   695  1,000    137,660   690  1,000
  8  Apr-2024  138,364   693  1,000    137,348   688  1,000
  9  May-2024  138,055   692  1,000    137,035   687  1,000
 10  Jun-2024  137,746   690  1,000    136,720   685  1,000
 11  Jul-2024  137,434   689  1,000    136,404   684  1,000
 12  Aug-2024  137,122   687  1,000    136,086   682  1,000
 13  Sep-2024  136,807   686  1,000    135,766   680  1,000
 14  Oct-2024  136,491   684  1,000    135,445   679  1,000
 15  Nov-2024  136,174   682  1,000    135,122   677  1,000
 16  Dec-2024  135,854   681  1,000    134,798   676  1,000

Code: Select all

 17     Total          8,273 12,000            8,217 13,000

[barnaclebob]

You said there was a "notes" section when you make a payment.

Have you tried putting "payment to be applied to principle only" in that note section?

Otherwise show up in person to the bank and see if that gets some traction.

[tonyclifton]

OP, I know you are frustrated but how many of these extra payments did you make before you noticed the pricipal was the same and not going down? From what you described your payment portal does not have an option to pay towards principal which sounds weird to me. Making extra payments to principal by paper check with a note seems cumbersome but totally possible. Seems your bank doesn’t make it easy to pay off loans early. You might refi ace to another bank that that has better / more favorable repayment options. ThirdFederal allows for extra payments to principal and no early payment/payoff penalties.

Also, sometimes a payment to principal is handled as a “transfer” not as a “payment”. Can you transfer to that loan balance?

[LotsaGray]

g

We have been making extra payments each month on a mortgage. Our bank has been applying it to interest and zero to reducing principal. I know some banks require you to tell them to apply extra payments to principal. However others (like Wells Fargo) do not and apply it automatically to reduce principal. You dont have to tell them. Our bank does not address it at all in loan documents or their online payment system. But instead they say it is all applied to interest and our next regular monthly payment isnt due until Oct 2025. Another bank where I have a loan has an online option checkbox to pay and it insists to declare regular payment or extra principal payment before you submit. But the bank in question does not.



Ridiculos. So I am going to fight it. I want those payments applied to principal of course. Any suggestions appreciated.

Just continue making regular payment amount but note it as 100% principal until next October. Th result is the same.

[PeterA007]

We know what to do going forward. We want to correct what went wrong.
If I want to pay off this loan tomorrow, I want the correct balance due.
Your suggestion does not address that.

[InvisibleAerobar]

g

We have been making extra payments each month on a mortgage. Our bank has been applying it to interest and zero to reducing principal. I know some banks require you to tell them to apply extra payments to principal. However others (like Wells Fargo) do not and apply it automatically to reduce principal. You dont have to tell them. Our bank does not address it at all in loan documents or their online payment system. But instead they say it is all applied to interest and our next regular monthly payment isnt due until Oct 2025. Another bank where I have a loan has an online option checkbox to pay and it insists to declare regular payment or extra principal payment before you submit. But the bank in question does not.



Ridiculos. So I am going to fight it. I want those payments applied to principal of course. Any suggestions appreciated.

Just continue making regular payment amount but note it as 100% principal until next October. Th result is the same.

It's not the same, because had the extra payments been timely applied, the outstanding principal would have been correspondingly reduced for each of the last 12 months. And because interest charge for a particular month is assessed solely based on respective outstanding principal for that month, this means that the OP has been paying extra interest (to the benefit of the holder of the mortgage note).

[toddthebod]

It's not the same, because had the extra payments been timely applied, the outstanding principal would have been correspondingly reduced for each of the last 12 months. And because interest charge for a particular month is assessed solely based on respective outstanding principal for that month, this means that the OP has been paying extra interest (to the benefit of the holder of the mortgage note).

Depending on when he took out the mortgage (and the corresponding rate), it may not have been to the mortgagee's benefit!