Any mortgage / interest experts available?

[LwnmwnMan2]

In my situation, my cash flow is 4-5 x's better in the summer as compared to winter.

I talked with the mortgage company today and asked if I could pay my mortgage ahead, basically making 2 payments / month for 6 months, so I don't have a payment in the winter, and they said sure.

What I'm trying to figure out is, would I be better off doing it this way, or would I be better off to open up a savings account, put the money in there, and have the payment taken out of that account.

I realize that there is some interest to be earned in the savings account, but would the reduction in principle quicker be a better option?

[BobT]

It won't make any difference unless you continue to make your payments in advance during the remainder of the contract. Interest is charged according to your daily unpaid balance each month and interest savings will only be applied on the last payment's received date.

A loan schedule is written assuming you will make your payments on a particular day each month; let's say the first day of the month. The interest is calculated accordingly. If you send your payment along with a coupon and it arrives on the 25th, the money you sent is applied as if it arrived on the 1st. This is because by sending the coupon you are telling the bank that the money is to be applied to that particular payment.

If your loan payment is $500 and you send an extra $500 one month without sending any coupon with it, your bank will apply that money toward your loan balance and your daily interest charge is reduced but it will not record that you paid an extra payment. In this case, your next payment will still be due as scheduled. Because you paid extra money and reduced your unpaid balance, you will save interest expense.

What you gain by paying ahead is that you satisfy the obligation of your loan for the slow months so you don't have to worry about making those payments. It's a good idea if your cash flow is unstable. When you have good flow, pay ahead to cover the low months and eliminate that obligation. If you get ahead and stay ahead, you will save a small amount of interest at the end of the contract too.

[upnorth]

When you figure the difference in interest between savings and mortgage I would say pay ahead. Any reduction in principle will reduce the overall interest you pay pretty good. For each 500 reduction in principle at 5% would save you something like $25 per year. And as you reduce principle you also reduce the interest portion of your payment per month and more will go to principle each month further reducing your overall interest. Saving accounts now days is not the investment it used to be. I am thinking the average savings account is about 1/2 a percent, when you figure inflation putting money in saving accounts is pretty close to losing money. Sad thought.

[LwnmwnMan2]

  BobT said:

It won't make any difference unless you continue to make your payments in advance during the remainder of the contract. Interest is charged according to your daily unpaid balance each month and interest savings will only be applied on the last payment's received date.

A loan schedule is written assuming you will make your payments on a particular day each month; let's say the first day of the month. The interest is calculated accordingly. If you send your payment along with a coupon and it arrives on the 25th, the money you sent is applied as if it arrived on the 1st. This is because by sending the coupon you are telling the bank that the money is to be applied to that particular payment.

If your loan payment is $500 and you send an extra $500 one month without sending any coupon with it, your bank will apply that money toward your loan balance and your daily interest charge is reduced but it will not record that you paid an extra payment. In this case, your next payment will still be due as scheduled. Because you paid extra money and reduced your unpaid balance, you will save interest expense.

What you gain by paying ahead is that you satisfy the obligation of your loan for the slow months so you don't have to worry about making those payments. It's a good idea if your cash flow is unstable. When you have good flow, pay ahead to cover the low months and eliminate that obligation. If you get ahead and stay ahead, you will save a small amount of interest at the end of the contract too.

The bold statement is what I'm thinking as well, but I just don't want to miss out on something obvious.

Yes, 5-8 years ago a person would have been able to take that $15-18k and put it into something and make a decent return on it, but in today's economy I'm looking more at just making sure the mortgage is paid in the "low cash flow" season.

I can work 6-7 days / week in the summer months, but the winter months I work 3-4 days / month.

[CJH]

With the ridiculously low amount of interest paid today (lower than inflation) in interest bearing accounts, it would be better to pay ahead. You would get the piece of mind plus, depending on how your bank would work the payments for you, you could save some interest on your loan as well.

[DTro]

I think when you say paying ahead, you mean that you won’t be paying at all in the winter months due to little income?

That is a lot different than paying ahead plus your normal payments in the winter.

I think I would put the extra money in a savings account and continue to make the payments through the winter as normal using that account as your “income source”.

[LwnmwnMan2]

  dtro said:

I think when you say paying ahead, you mean that you won’t be paying at all in the winter months due to little income?

That is a lot different than paying ahead plus your normal payments in the winter.

I think I would put the extra money in a savings account and continue to make the payments through the winter as normal using that account as your “income source”.

You DO have a good idea. However, I'm VERY bad at managing my money, which is a VERY bad thing when you run a business.

I've tried to do what you suggested in the past, but come Christmas time, birthdays, etc., a guy gets to feeling guilty about how much time he spends away from the family working, and buys stuff that he shouldn't to show appreciation for all.

I'm trying to work my money philosophy over, which isn't a real easy thing to do when you're already committed to a certain amount of payments, which can't be dumped due to the business (yes, I know what Dave Ramsey says).

So, while I have the money, I'm going to commit it where it HAS to go, before I wonder "WHERE" did that go.

[BobT]

Paying ahead now or putting the cash aside to pay it later makes no difference in the end. If you pay ahead 6 months, don't pay any more during those 6 months, and then resume normal payments when the 6 months are over, the interest will accrue during those 6 months and your loan balance will be the same as it would have been had you made your payments at the regularly scheduled time. The only difference, if you're disciplined enough to leave it there, is the interest you could earn if you put the cash for those 6 months worth of payments into an account that could give you a return as dtro suggested. The interest you'd make is pretty minimal though unless you're talking about some serious ching.

[dfv87]

In commercial lending we have what is called a skip payment loan in which you make monthly payments based on a less than 12 monthly payment year. For example; a resort may have 4 monthly payments in June July Aug Sept, then nothing the rest of the year (or just an Int only payment). Or a Bus company with a school contract would pay 9 months out of the year while school is going on. Interest still acrues during the skip months and it may take several payments to get all the interest current when you do begin again. The monthly payments made are higher than a standard monthly payment due to less of them (obviously). These type of loans are very seasonal and must be specifically set up usually not something you can modify to. A home mortgage (secondary market)is most likely not set up to be modified for something like that.

[LwnmwnMan2]

  dfv87 said:

In commercial lending we have what is called a skip payment loan in which you make monthly payments based on a less than 12 monthly payment year. For example; a resort may have 4 monthly payments in June July Aug Sept, then nothing the rest of the year (or just an Int only payment). Or a Bus company with a school contract would pay 9 months out of the year while school is going on. Interest still acrues during the skip months and it may take several payments to get all the interest current when you do begin again. The monthly payments made are higher than a standard monthly payment due to less of them (obviously). These type of loans are very seasonal and must be specifically set up usually not something you can modify to. A home mortgage (secondary market)is most likely not set up to be modified for something like that.

Yes, this is how most of my mowing equipment is set up with the local bank. I pay 7 months out of the year, and then 5 months of no payments.

I DID talk to USBank and they 'said' I could make advance payments and dictate what they were for, meaning since I already made May and June's payments, I could next week make two more and say they were for July and August, and supposedly they would then be marked as paid.

I realize that the interest will still accrue over winter, as that balance will then just sit steady. However, as I stated earlier, I'd be more relived that the mortgage payment is made, rather than not be able to sleep at night, worried that you're going to have to move the kids out of the house.

[LwnmwnMan2]

My biggest fear is that I pay these payments ahead, and then I still get notified that the payment is due, that in fact these payments do NOT get marked off in the computer system, and then I have to come up with payments in the winter, thinking that they had already been paid.

[upnorth]

I would get it in writing from a banker as to the agreement.

[Tom7227]

"Said" don't mean squat when dealing with this kind of stuff. I would be stunned if a bank agreed to this, and no way would I do it without a competely executed agreement allowing it. I just took a real estate class at Hamline Law School and come out of it with a very strong impression that the letter of the mortgage document is what's going to control. With some mortgage documents they can snap you if you're a day late on a payment and call the whole thing due and payable if they want according to the instructor. I can't work out the math to know if you'd end up with a lower mortgage by paying for 12 in 6 months. You would even have to figure in the impact on your taxes with the altering of the deduction schedule since you'd throw it out of whack.

I wouldn't be surprised if they took every additional payment and used it totally to reduce the principal- I think that's required for some mortgages such as VA and FHA loans, maybe others. Then in month 7 they would declare you in default if you didn't pay a full payment.

Maybe they would agree to allow some additional monies paid in the summer and interest only payment in the winter. Whatever you do make all conversations occur face to face, keep notes of what was said and particularly who you were talking to, and then get a mortgage document exeucted that meets the new setup.

[BobT]

I've never run into a problem making payments in advance before. I assume you have a payment coupon that you have to send with each payment. What if you pay February's payment on January 15th when it isn't due until 2/1? The bank will still accept the payment and you should have a receipt to prove it.

[LwnmwnMan2]

  BobT said:

I've never run into a problem making payments in advance before. I assume you have a payment coupon that you have to send with each payment. What if you pay February's payment on January 15th when it isn't due until 2/1? The bank will still accept the payment and you should have a receipt to prove it.

Yes, I agree when it's 30-40 days in advance, but we're talking months in advance, as next April's payment will be paid September of this year.

I'm not sure what you mean by taxes though Tom. Property taxes will be the same whenever I pay the mortgage, as we don't have our taxes put into our payment.

[CJH]

  BobT said:

I've never run into a problem making payments in advance before. I assume you have a payment coupon that you have to send with each payment. What if you pay February's payment on January 15th when it isn't due until 2/1? The bank will still accept the payment and you should have a receipt to prove it.

We did this with our last house. The bank (Wells Fargo) did screw up a few times, but it was easily corrected. Just stay on top of it (keep your receipts/photocopy everything!!!!) and work with a local banker so they can straighten out any problems you may have.

[Jackpine Rob]

The default in many of the loan processing centers is to treat the "extra" payment like a principal reduction. In other words, the computer sees that you are due for your June payment, and when 2 or more months worth are received it assumes that you are making principal payments.

In my example you try to make June, July and August payments on June 1. The computer says "YEEHAW" and credits you for June, and puts the other two payments to principal. Along comes July 1, and you don't make a payment.

Ooops. July 15 comes and goes with no payment, and you receive a late charge notice. Screaming commences.

That type of thing can be backed out and properly credited (usually) but it can be a real pain in the butt for all concerned. You CAN make multiple payments ahead, but you really need to pay attention, get in contact with your loan servicer and insure that the payments were credited properly. Communication with your loan servicer is the key here.

As already noted, your home loan is an entirely different animal than a business loan. Most of the business loans are serviced by a real human being at your bank, and contact is easily accomplished. Your home loan is just one of thousands being handled by a company that might not even own the loan it is servicing. You are just a pebble on the beach.

[Tom7227]

It could screw up your interest deduction on your income taxes is that I meant by screwing up the taxes. As Jackpine Rob wrote, the additional payments most likely would be credited to principal and would reduce your mortgage substantially. But they would not be deductible as an interest payment and so your income taxes probably would go up. Just for the heck of it pull out your existing mortgage and carefully read what it says about this subject. If you can find it, and understand it, you're doing better than most. I would be surprised if it allows for the thing you are considering.

I think you're headed for a real headache if you don't get this all worked out in writing well beforehand.

I have absolutely no faith at all in any of the mortgage people at the large banks. The hassles my daughter had refinancing with Wells Fargo just to get a simple reduction in the interest rate was incredible - and it was their continued screwups with the paperwork - nothing at all about the kid's end of things.

[LwnmwnMan2]

  Tom7227 said:

It could screw up your interest deduction on your income taxes is that I meant by screwing up the taxes. As Jackpine Rob wrote, the additional payments most likely would be credited to principal and would reduce your mortgage substantially. But they would not be deductible as an interest payment and so your income taxes probably would go up. Just for the heck of it pull out your existing mortgage and carefully read what it says about this subject. If you can find it, and understand it, you're doing better than most. I would be surprised if it allows for the thing you are considering.

I think you're headed for a real headache if you don't get this all worked out in writing well beforehand.

I have absolutely no faith at all in any of the mortgage people at the large banks. The hassles my daughter had refinancing with Wells Fargo just to get a simple reduction in the interest rate was incredible - and it was their continued screwups with the paperwork - nothing at all about the kid's end of things.

Thanks Tom, completely forgot about the mortgage interest yesterday.

The more and more I think about it, I think I'm going to open a savings account and put the money in there.

I'll then set up the mortgage account to draw out of this account.

My biggest worry is what you guys say, and I pay the mortgage ahead and then am told "oh no, that's just principal you paid".

For 95% of my banking, I deal with the president of the local small town bank. If I'm having issues with cash flow or need a loan with a special payment plan, I know it gets taken care of.

However, the local bank does not hold mortgages (not firsts anyways) and sells them, which is why we're with USBank.

Now that I think about it, does anyone know if you can go to a USBank branch and deal with someone in person to pay your mortgage, even if you don't have a checking or savings account with them?