quote:

Originally posted by sigarmsp226:
I just calculated (on line mortgage calculator) and by making a one time payment like I did my monthly interest should go down, based on where I am in my loan, from about $385 a month to $252 a month so I will be calling the bank tomorrow.

Even if they charge a small fee to recalculate the loan it should pay for itself real dang fast considering the interest saved will be slightly more than $130.00 a month…..

Thanks again to all of you who responded….Mark

You're overthinking the problem by trying to work in the rule of 78. I'm going to help you figure this out in three separate steps.

Here's what you need to do:

1) Get your loan document and your loan statements before and after you made the extra principal payment. At the very top, there is an APR listed on the loan document. This same APR should also be showing on your loan statements.

Next, look at the current principal balances in the loan statements before and after you made the additional principal payment. You should have a statement that records the extra principal payment. In that prior statement and in that statement, do the ending principal balances reflect the reduction due to the extra principal balance? If you don't have a statement recording the extra principal payment or the principal balance being reduced by additional amount, then you have a bank recording problem.

2) Assuming you do have a loan statement showing the additional payment being recorded and the principal balance reduced by that amount, the next step is to take the APR listed in the loan document and divide it by 12. For example, if your APR is 6%, dividing it by 12 gives you 5% or .005. Now, multiply that amount which in this example is .005 by the principal balance in your latest loan statement. Or in your case, 4.5% divided by 12 is .00375. Multiply .00375 by the principal balance on your latest loan statement. Is the answer close to the interest charged by the bank in that statement or significantly closer to the $252 you calculated online? If your calculation is close to what the interest charge is on your statement, then the issue is a matter of your perception / expectation.

3) Assuming your calculation is closer to the $252 you calculated online, then with your loan document and loan statements handy, call the bank tomorrow and ask for an explanation. And any explanation that they give you like, "Well, this is because such and such and that's why the interest charged is not as if the principal balance was reduced," ask them where in the loan document is that such and such. If the such and such is actually in your loan document, then you're stuck or you may come back here and quote that such and such and people can chime in whether the bank's interpretation is incorrect; doubtful that they're incorrect but not completely impossible. If it's not in the loan document, then that makes things more complicated because the loan document is the contract and any contract binds the parties who agrees to that contract. Again, it's doubtful they are not following the loan document but not completely impossible.

Good luck.

Let me try to explain with a simple example:

Let's say you borrow $100k at 6% interest for 15 years (180 months). Your payment would $843.86 on this loan.

You sign the paperwork.

Your first year would look like:

Begin Balance Interest Payment Ending Balance
1 $100,000.00 $500.00 -$843.86 $99,656.14
2 $99,656.14 $498.28 -$843.86 $99,310.56
3 $99,310.56 $496.55 -$843.86 $98,963.25
4 $98,963.25 $494.82 -$843.86 $98,614.21
5 $98,614.21 $493.07 -$843.86 $98,263.42
6 $98,263.42 $491.32 -$843.86 $97,910.88
7 $97,910.88 $489.55 -$843.86 $97,556.57
8 $97,556.57 $487.78 -$843.86 $97,200.50
9 $97,200.50 $486.00 -$843.86 $96,842.64
10 $96,842.64 $484.21 -$843.86 $96,482.99
11 $96,482.99 $482.41 -$843.86 $96,121.55
12 $96,121.55 $480.61 -$843.86 $95,758.29

Interest is half of one percent per month. It is calculated of the Beginning balance each month in the example. Total Payments would be $151,895 give or take rounding.

Now lets before your first payment is even due you come into $50k and put it against the loan. It is applied against principle. Your monthly payment is not going to change. You still borrowed $100k and owe the $843 per month. Making the $843 payments you would be done in 70-71 months. The total of all your payments would be $110k. Saving about $42k in interest.

Begin Balance InterestPayment Ending Balance
1 $50,000.00 $250.00 -$843.86 $49,406.14
2 $49,406.14 $247.03 -$843.86 $48,809.31
3 $48,809.31 $244.05 -$843.86 $48,209.50
4 $48,209.50 $241.05 -$843.86 $47,606.68
5 $47,606.68 $238.03 -$843.86 $47,000.86
6 $47,000.86 $235.00 -$843.86 $46,392.00
7 $46,392.00 $231.96 -$843.86 $45,780.10
8 $45,780.10 $228.90 -$843.86 $45,165.14
9 $45,165.14 $225.83 -$843.86 $44,547.11
10 $44,547.11 $222.74 -$843.86 $43,925.98
11 $43,925.98 $219.63 -$843.86 $43,301.75
12 $43,301.75 $216.51 -$843.86 $42,674.40

Now suppose you had the $50k before you signed the loan paperwork. You could borrow $50k. If you did that at 180 mnonths and 6% interest. Your payment would be $421.93 (half of the above). In total you would pay $76k on the loan plus the original $50k. $126k in total. This is higher because you are paying less each month and therefore more interest on the loan over 15 years versus 6ish years with the higher payment ($843).

As mentioned above (in another post) some lenders will recast your loan if you make a big payment and pay a small fee. Why because they win with reducing the payment because you will be in debt longer and paying more interest.

I didn’t read the question correctly. I thought OP wanted the lower payment.

While true the payment will not change the amount going to interest vs principal definitely should change. Call the bank and have them tell you why.

quote:

I understand on a home mortgage the bank gets to collect a lot more interest during the early life of the loan - Is this the "Rule of 78"

I think a lot of the responses have addressed that the 'rule of 78' is not at work. That aspect seems covered.

OTOH, if you are not sure why there is more interest being paid at the start of the loan, that's a math thing having to do with equal payments through the life of the loan, and doesn't rely on the details of the loan.

Essentially, it's because you actually owe more at the start. As you whittle away at the principal, the interest due on the remaining balance gets smaller so that more of the equal payment goes toward reducing the loan balance.

If you think about the end of the mortgage, it'll be obvious how this works. Right before that final payment, you only owe a small amount, and one payment covers that final principal and one month's interest on that small amount.

Now at the start, you owe the whole amount borrowed. Of course, one month's interest on the entire balance is a lot higher than the interest due right before payoff. But you're making the same payment throughout.

Not sure if this is overkill - hope it helps.