Does your Mortgage Recalc Interest for Extra Principal Paid?

[catccc]

If you pay extra on your mortgage this month, does your bank actually lower the amount of the following month's payment that goes to interest? (Lower interest than the original amortization schedule's indicated?)

I always thought the answer was yes, this is how a loan works. About 3-4 years ago, I was told no, they do not recalculate the interest, but you'll save at the end of the loan when it ends early.

Over on another forum, everyone is telling me this is wrong wrong wrong, and the interest is recalculated monthly on most mortgages. But I just rounded up some co-workers (accountants, mind you, you'd think they'd know how their own mortgages work) and 3 of 3 told me their interest does not recalculate for extra payments.

I understand the required payment would be the same. But would the interest/principal breakout adjust for the new lower principal balance? How does your mortgage work? Have you run the numbers to confirm?

[rodeosweetheart]

I actually don't have a mortgage, but back when I did, it did not recalculate when I paid extra on principal. I'd be shocked if any of them did--it would be an accounting nightmare, and mortgage holders already seem to do an awfully poor job of keeping track of paperwork, so I would not trust them to do it correctly if they offered.

[catccc]

I actually don't have a mortgage, but back when I did, it did not recalculate when I paid extra on principal. I'd be shocked if any of them did--it would be an accounting nightmare, and mortgage holders already seem to do an awfully poor job of keeping track of paperwork, so I would not trust them to do it correctly if they offered.

Thanks for the response. See, I'm so surprised to hear this, as zero respondents on another forum concurred that mortgages typically do not recalculate. Now, just to be clear, you understand that I am asking about the interest/principal breakout, not the payment in total, right?

[sweetana3]

Well, from an accounting standpoint, the payment never changes unless the terms change but the interest is a % of the amount owed. If the amount owed is halved, as an example, the interest rate would be applied to the new lower amount, or half the original loan. What is the problem? The same thing would apply each time a payment of principal is made. There should be at the end of the year a statement to breakdown the interest and principal paid. You should see changes each month. Now, I can see banks wanting to get their money and telling customers almost anything.

Interest is the cost of borrowing money and the rate is applied to the amount owed. Perhaps they did not understand the question or you are talking about apples and oranges. I have never found talking to coworkers valuable.

ps: I just googled "How is mortgage interest calculated?" and got a good website with the whole set of pencil and paper calculations.


Part of the calculation of interest on a mortgage:

Multiply the loan value by the period interest rate to determine the first month's interest, and then subtract that amount from the monthly payment to get the first month's principal. $750,000 * 0.005 = $3,750 $4,496.46 - $3,750 = $746.46


Subtract the principal from the current loan value to get the new loan value. Then repeat steps four and five until the loan value reaches zero. $750,000 - $746.46 = $749,253.54 $749,253.54 * 0.005 = $3,746.27, the 2nd month's interest $4,496.46 - $3,746.27 = $750.19, the 2nd month's principal

So you see that any calculator is using the loan value (principal) to get the amount of interest and principal for each payment.

[lmerullo]

Is this in reference to a fixed rate or adjustable?

We don't have a mortgage either, but when we did - any extra payment came off the principal. At the end of the year, when figuring the payment schedule for the next year, the term was not reduced, which resulted in a 30 year projection always being utilized, and would have had us making rediculously low monthly payments in the last years - something like $92 monthly!

When I was helping my dad with their fixed - more than 10 years ago - the added principal payments resulted in a shorter term, and the FINAL payment was calculated based on all the prior payments and their interest. It was as if they saved all the adjustments for the end, instead of keeping track month by month.

[catccc]

ps: I just googled "How is mortgage interest calculated?" and got a good website with the whole set of pencil and paper calculations.

So you see that any calculator is using the loan value (principal) to get the amount of interest and principal for each payment.

Well, thanks guys, but I don't think my question is clear. I inevitably get "this is how interest is calculated" when I ask this question, but that isn't the question- the question is how often does a lender recalculate the interest based on the current principal. I understand how interest is calculated. I understand that typically the payment does not change unless the mortgage is recast. I understand you can specify that additional payments are to go toward principal. I am grateful for your responses, it's just frustrating to get responses that don't really answer my question. Probably my bad for not explaining it clearly, though.


Is this in reference to a fixed rate or adjustable?

We don't have a mortgage either, but when we did - any extra payment came off the principal. At the end of the year, when figuring the payment schedule for the next year, the term was not reduced, which resulted in a 30 year projection always being utilized, and would have had us making rediculously low monthly payments in the last years - something like $92 monthly!

When I was helping my dad with their fixed - more than 10 years ago - the added principal payments resulted in a shorter term, and the FINAL payment was calculated based on all the prior payments and their interest. It was as if they saved all the adjustments for the end, instead of keeping track month by month.

Yes! Thank you, "....as if they saved all the adjustments for the end." This is my concern. Is this typically the way it works, or do they typically track it month by month?

[lmerullo]

I may have mis-worded. What I really meant was there was a true-up at the end, but there was still "tracking" done monthly.

[sweetana3]

It should, rather can be, be recalculated at each regular payment to know exactly how much interest is being paid. The reason for this is you could request a pay off or balance at any time.

Otherwise, there is never an accurate record of payments and the breakdown of principal and interest. I can see some banks waiting for the end of the year to generate the paperwork because they have to do it then, but with the sophisticated programs out there it should not be a complex issue. After all, each payment is entered and each principal payment is entered on the account (because dates are critical). If I ever caught a bank entering all early payments of principal as made on the last day of the year, I would be on the way to a lawyer.

So I still dont really understand what you are asking. The banks have the ability to "track" at any time because you could sell the property and pay it off at any time. But they dont really care much beyone what they are required to do (end of year and payoffs). Do you think something is missing or they are not doing something they should or are you thinking you are paying too much?

[rodeosweetheart]

I thought I understood, but maybe I am not remembering correctly--haven't had a mortgage in four years, but when I did, I made irregular extra payments, and I did not think that it altered the amortization schedule until the final payoff of the house. Admittedly, that sounds sketchy, but that was what I was remembering.

But you are correct, that does not sound right, as far as what should have happened.

[sweetana3]

The banks are probably not going to provide future payoffs (or new amortization schedules) for anyone. Just to iffy and unnecessary. That is why there are so many online for people to play with.

[jp1]

I've never had a mortgage so I don't know how this all plays out in the real world, but I agree with sweetana. With the computer programs that exist there should be a truing up each month. After all I've never heard of a bank that had trouble maintaining credit card accounts, and those certainly go through many more changes each month then a mortgage. After all, when was the last time someone carrying a credit card balance didn't get charged interest on a new charge until the end of the month because the bank thought it was too complicated to figure out what the interest amount would be?

And the difference, over the life of a mortgage with lots of early principal payments, could easily add up to real money.

[Birdie]

For the last mortgage I had, I printed the amortization schedule. Every time I paid extra principal, I figured out where I moved down on the schedule and when I got my next statement it matched my records. My mortgage company adjusted how much went to principal and interest with every payment.

As other posters said, it saved quite a bit of interest by paying extra principal.

[catccc]

Thanks all. After asking lots of people, I think I've come to a conclusion. The bank rep that told me the interest does not recalculate was wrong. You do save interest immediately when you pay extra. Good news for us all. Interestingly, the bank rep made it sound like it was all about banks maximizing revenue, not an issue of resources to do the calc. I can do it in excel quite easily, so I'm sure they can, too.

[jennipurrr]

My mortgage does recalculate every month when we pay extra to principal. However, my DH had these horrible private student loans and when we made an extra payment it would not go to principal, so it just went to future interest...the total interest over the course of the loan was not changed no matter how much extra we paid. It just pushed out the next payment date we needed to make. Most mortgages are not like this I believe, though. You may have to write a separate check and put "extra principal payment only."