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.