Another Mortgage Tip: Sending Extra Payments
Last week I told you about the mistake I made with trying to pay off our second mortgage. Well, another tip that I learned a few years ago occurred to me that I know some of you have also had to deal with:
Sending in extra payments
We’re on a monthly payment plan, not one of those “pay twice a month” deals. Our payment is due the first of every month.
Now, I use online billpay with my bank to just send a check directly to the bank without the paper slip from the bill. But what I learned a few years ago when I tried to make a SECOND payment in the same month as one I already paid for was that the mortgage company applied the payment to the next month’s interest first, thus resulting in much less principal reduction. I was expecting the entire amount would go towards principal rather than the next payment, so I called the mortgage company.
You know what their rule is about sending “extra payments”?
You need to send the extra payment to a different mailing address.
Whahuh? If I’m sending in an extra amount well before the next due date, and the amount is not even close to the regular payment amount, then I would expect their “system” to recognize the intent is an accelerated loan payoff. But no, they want to strip out all the interest first and apply it to the next month no matter what.
I’m sure it makes sense in some financial world somewhere, but to me it’s idiocy. Therefore, I plan around it by just sending the extra payment in with the regular mortgage payment (same check) and avoid this special second address.
Can anyone explain the reasoning the mortgage company might have for this type of action? I should also add that including the memo “apply full amount to principal” or anything similar doesn’t work. You HAVE to send it to the other address.
We do our mortgage payments online, so when I want an extra payment I just tack it on to the regular payment for the next month, which works just fine. They apply the extra towards principal and then I can just go in and modify the payment as needed for the next month. This is with Citi Mortgage.
Their reasoning is profit maximization. If they made it easy to get out of debt, more people would do it. Therefore, they make special rules about how to pay extra, apply payments to interest instead of principal, and sometimes even charge “prepayment penalties” if your total interest has been lower than they expected. Pretty scummy, really.
That’s odd, to require two addresses. Our mortgage company does a pretty good job, making things rather easy. As long as I send in one payment equal to (or greater than) the actual payment, I can send in “extra” payments, throughout the month, and they’ll automatically be applied to principal. Because I’m insane, there are times when I send four or five “extra” payments. (In my case, the sooner they receive the extra payments, the sooner they apply them, and the sooner principal balance is reduced.
-NCN
My student loan company (CITI) makes things difficult for me, too, but in a bit of a different way. I have 5 different loans at 5 different APRs. When I make an extra payment, I want this to go to the one with the highest APR. So, of course I can’t do that online — I have to send a check via mail. Not only that, but I found out I too have to say “Apply to principal” otherwise they will just advance my due date on the loan. So annoying.
In regards to them advancing the due date of the loan, can’t you still pay to the loan when it would have normally been due?
i have a mortgage with wells fargo and the receipt i send in with my payment every month has an extra box where you can write in any additional amount you want to use to pay down the principle.
I haven’t paid any additional principle yet, but for my loan it looks pretty straight forward.
It really drove me nuts to see the small amount of principle that i paid for last year, compared to the interest. My goal for this year is to pay it down some.
Wells Fargo is the very bank who does this kind of scummy tactics. I learned this 2 years ago when I applied extra monthly payments to our mortgage principle as well. In fact, my wife would walk it into the branch and have them manually process the payment. The tellers would always say “yes, it was applied to the principle.” We’d go on-line every month to check and see that the principle amount was reducing appropriately… and it did… until we got the paper statement. The paper statement said our next payment wasn’t due for another 4 months!!!! So we called to ask Wells Fargo “WTH!” To our dismay the call center reps couldn’t figure it out, the lazy reps said “Well, because you haven’t paid any interest on your account since 6 months ago!” I demanded to talk to a manager, but the “manager” as well couldn’t figure out what went wrong so they said they had to refer me to the Equity office. Whatever the hell that is. I told them we have direct bank withdrawl for the monthly payment due every month on the 1st of the month. With out hestitation they took out the exact amount due each month. On top of it on the 15th my wife would go in person to the local branch and write a separate check for $500 extra to the principle.
After 4 frustrating phone calls, Wells Fargo tried to tell us that our monthly payments that were due on the 1st of the month were entirely going to principle not any interest. We said that is clearly not the truth because we see the break down of the payments on the on-line statement. Plus our principle amount due wasn’t any where near the correct balance if they had applied the entire monthly payment to the principle.
Wells Fargo insisted we were causing the mix up on our account by making extra principle payments. That makes NO SENSE whatsoever. Their billing systems are antiquated and unable to apply payments accordingly. If you don’t watch your statements you too might be the victim of fleecing.
My bank is not the only one…I just noticed the additional $120 I paid at the later part of June the bank took interest out of it. This was a bonus payment in addition to the regular payment already made on June 12 with auto withdrawal. I bank online, and this is the first time I caught them doing this. Who knows how long they have been doing it. The so called “annual” interest is a joke of course, as they charge interest daily, so it sure as heck is not 5.74% annual! Anyway, it ticked me when I saw this privately owned banked pulled such a boner! I did send an email expressing my concern and anger. Greedy blankety blank banks! Guess I will need to schedule my bonus payment same day as regular, but likely they will still take interest out. It is very odd…the bank statement shows my regular payment with interest taken out. I made the extra payment of $120 and the loan reduced to under $10,000, now it is over $10,000, so indeed they are getting extra interest beyond what they subtract from the payment. I can’t even do an amort schedule to see where that would take me because the annual interest is NOT annual…not when it compounds daily!
All the banks in the US was robing the citizen with govermnet proteted rules and law’s, year after year. Stupid bank thought that they can do it for ever and no one is going to stop them. But the Newton law is alway’s true. “Every action ther is an equal and oppesit reaction”. Tht is exactly happening over here now. All the banks screwed up. Thousand and thousands of houses are forclosing. All the stupid banks loose the money. Nasty politians are trying to protect bank with bail out money. But still it all the baks going down. I need to see one day all the major crooks banks are collapsing. Great. it will continues again and again.
I’ve been paying extra on the principal along with my mortgage ,I always check extra payment on principal on my statement. I’ve emailed wells fargo to ask why are they appling interest to the principal payment when the interest is allready been taken out from the mortgage payment for that month. as per date I have not yet received a comment…
Thank you for sharing. It’s very useful. Hope to hear more from you.
New American Funding does the same thing. I pay my regular mortgage payment online 1-2 days prior to due date. Two weeks later send in additional payment to PRINCIPAL only and the last 4 months they have applied all 4 payments to “next months” payment taking out interest first. Call them, usually takes 2-3 calls to get straightened out. The continue to blame it on their automation processing? I am using their payment slip, Blacking out Amount due area, filling in Additional Principal line with the amount, additional escrow/late charge and Other boxes with “0’s”. Writing PRINCIPAL (along with loan #) in NOTE area of check and circling with red highlighter. Somehow their automation process is able to read the correct amount, yet apply it to the wrong area. MISTAKE? Hardly!