Lets say you have a 20 loan at 4% for $150k that is a couple years old So you paying maybe $1000 a month and $400 goes to principal and $600 to interest. Don't pick this apart. as remember this is hypothetical.

Lets say you decide to pay it down so you apply $100k towards the principal. So now you have a loan that say is $47k. The payment is the same per month. You would think the principal would $700 300 PI. How come it is not. It is more like $500-$500
Why is that?

I think that payments are recalculated once a year.

If you mean a mortgage, you just pay it off quicker.

quote:

Originally posted by 220-9er:
If you mean a mortgage, you just pay it off quicker.

Yes, A mortgage is what I was referring too.

If you are going to pay it off sooner it would seem like the amount of interest would be substantially less. Because you have paid 2/3's of the loan amount back. but some how they screw you on that it would seem?

It shortens the term of the loan, it doesn't decrease the payment amount, unless you re-finance the remaining principal. In which case, you'll pay the fees all over again.

However, it does have the effect of reducing the amount of interest you pay, because you don't pay the loan over the longer term = less interest accrued.

If you want, I can send you an amortization schedule in Excel. It would be easier than trying to explain with words.

This is not financial advice.

Loans are not required to allow pre-payment of principal. So, when you sign up for 150k at 4%, if the loan terms do not allow pre-payment, then you have signed up to pay back 150k plus the interest that would accumulate over 20 years at the stated rate. Basically, a loan can have you agree to pay the interest that would have accrued based on you paying your monthly payment and no more, regardless of whether or not that is how you actually pay.

Some loans will let you pay off more than is due each month, but there is what they call a pre-payment penalty for doing so. Essentially, since you are reducing the total interest the loan will make by paying extra early, there is a penalty fee that gets the lender some of that money back.

Only if you have a loan with no pre-payment penalties can you do what you described and pay off 100k, then instantly have the split between interest and principal change sharply. I can’t speak to how often people actually get this sort of deal on a home mortgage, but I can say that you probably get a slightly worse rate on this type of loan, as there is more risk that the bank isn’t going to make as much as they thought off of you.

- Bret

Your numbers are wrong. A 4% rate on a $47,000 loan would result in a monthly interest charge of $156. ($47,000 x .04 /12)

Not necessarily what you're interested in, but many mortgages have a feature called a recast where you can apply a large amount as you suggest, pay a nominal fee and they recalculate your mortgage with same term and interest, but it lowers your payment.

https://www.investopedia.com/t...m/mortgagerecast.asp

Make sure when you send them the extra you pay it as principal. Even though the payment stays the same you won't be paying interest and the original payment will make the loan pay off much quicker.
If your goal is to have a lower payment you could just refinance a much lower amount and then have a lower payment.

In your scenario, the P&I are about $450 each 2 years into the loan. After you make an extra principal payment of $100k, your payment would start at about $775 to P and $125 to interest, with each subsequent payment going more towards P.

For most loans, the payment is fixed. Each month, the interest is calculated for remaining loan balance (principle) over the number of days since the last payment. The remaining amount is applied to the principle.

Example: You just paid an amount that brings down your principle to $150K. P&I payment is $400/month. Interest is calculated on the $150K for the previous month (30 days) and it now comes to $125. So $400-125 is the amount that is now applied to the principle($275). It's really pretty simple...takes longer to explain than to do.

Exception: If your loan has some goofy terms, interest rates and special calculations.

Thank you guys. Some really great comments. And I really appreciate it.

No prepayment on the loan. BlackTalonjhp, thanks for the specific number crunching. That is roughly about what I was figuring but for some reason the interest is about 2-1/2 times that. And the principal is a couple hundred less. Which has me stumped.

if you look at your mortgage statement month over month you will note that although the payment stays the same, the division between interest and principle changes - so it recalculated the interest and being less than the previous month it added to principle

Did you check and make sure the $100k was applied to principal and not interest due or escrow?

Yes and yes guys. This thread will help me discuss with them next week. I believe they have something wrong. But we'll see.

My experience with math is that it is no place for hypotheticals and guesstimates.

Use a mortgage calculator or Amortization template to see real numbers.

Also remember that in addition to Principal and interest you have escrow for taxes and insurance and possibly mortgage insurance premiums as well.


Won't get an accurate answer if you don't use real numbers

quote:

Originally posted by sadlerbw:
Loans are not required to allow pre-payment of principal.

- Bret

Note that this can vary by state. Utah requires lenders to allow prepayment of loans on primary residential mortgages. Probably all states at least mandate it on sale or refinance. Otherwise, nobody could sell a house because the unpaid interest would often be greater than the equity. Perhaps it is a Sally/Fannie stipulation, IDK.

All the mortgage contracts I've had describe how prepayments affect the balances and how early payments get applied. I'd guess yours may cover that as well, somewhere buried in the detail. That'd be worth reviewing before you meet with them next week.

It is the intersection of interest calculation math (fun in itself) and that contract terms (legalese) that control how your particular mortgage treats early payment.

The math behind interest is a little complex, but the bankers should be able to explain the basis for their application of your payments. Absent some clerical or programming error, I would expect that their treatment fits their interpretation of the terms of the mortgage.

It may take a number of calm questions to get a full understanding of what they are doing. Now, that understanding may make you satisfied, or might tick you off, but it all starts with your having a full understanding.

Keep in mind, though, that interest rates are near the lowest they have been since humans quit living in caves, and there are zero cost mortgage lenders out there who would gladly refinance your mortgage. Most likely, given current interest rates and your having put more down (making the mortgage that much less risky to a lender) you would walk away from a refinance paying no fees or costs, and a lower rate than your current mortgage.

And your bankers know this. If they tick you off, thank them for their time and go find refinancing elsewhere. But, towards the end if you want to keep doing business with them, you could ask something like, "Given the current mortgage rate market, do you offer no-cost refinance options that would fit my situation? Alternatively, would you be willing to reduce the interest rate on the current mortgage?"

If you do go the refinance route, you'll have to think about the duration that you'd want. Also, be aware that - interest math being what it is - a new mortgage does start off with payments being mostly applied to interest and not principal.

Anyway, good luck with your meeting.

Update, did talk with them. They are willing to "recast" the loan with out changing the term or interest rate which is under 4%. No charge. Once they do that we can see how interest is affected. It certainly will lower the payment. Which is not our issue. But the amount of interest is.
I am thinking our best option will be to let them recast the loan which will make the payment less than 1/3 or what it is now. Take the difference monthly and pay that towards the principal each month.
Is that thinking sound?

Again, thank you guys for the great feedback on this topic.