Mehran Kamari, Home Buyer in Northridge, CA

Principle Only Extra Payments, Loan Re-Amortizartion?

Asked by Mehran Kamari, Northridge, CA Wed Oct 20, 2010

Hi all, I'm just wondering how making extra principal payments effects a loan. I know the P&I is amortized month by month from the get go. But if an extra payment is made do they recalculate the interest for the rest of the loan at that same moment? Or do you have to request it to be recalculated? I can't find any information on this anywhere.

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5
Shel-lee Dav…, Agent, Rolling Hills Estates, CA
Wed Oct 20, 2010
Mehran:

Steve gave you some good information. And, of course, you do need to check with your lender on exactly how they handle principal reductions.

On the other hand, if you are a numbers person and want to know the dollars and sense (I mean cents) about it, here is a quick recap. Based on an interest rate of 5%, if you make one extra payment per year, at the end of each 12 month period, you will pay off your 30 year mortgage at approximately year 25 and 4 months. You will save approximately $16,350 in interest on every $100,000 borrowed. So if you plan to stay in the house the rest of your life this makes sense. You have saved both time and money. Of course, the situation changes based on your plans. And, this analysis does not take into account any changes in your income tax liability. For a complete analysis the benefits of making extra principal payments, check with your tax and investment advisors. Good luck on your new home purchase and Dare to Dream.

Shel-lee Davis, QSC®
Certified Distressed Property Expert – CDPE®
Short Sale & Foreclosure Resource – SFR®
Certified HAFA Specialist – CHS®
Your Real Estate Consultant for Life
RE/MAX Palos Verdes Realty
http://shel-lee.listingbook.com
0 votes
Shaw Sadat, , Los Angeles County, CA
Wed Oct 20, 2010
Hi, making extra payments towards your principal does help reduce your loan balance faster. Consult with a lender for details. Also there are 4 types of Islamic financing available that you might be interested. They don't deal with interest. Contact me if you would like more info.

Shaw Sadat
Realtor
Pinnacle Estate Properties, Inc.
818.271.7764
Lic # 01456976
0 votes
Steven Ornel…, Agent, Fremont, CA
Wed Oct 20, 2010
Hi Mehran, it sounds like you are already aware that when you first start paying on a loan the portion attributed to interest is quite high and over time this eventually shifts to predominantly being principal payments.


"I'm just wondering how making extra principal payments effects a loan."

Simply put, additional principal payments have the effect of shortening the payoff of a loan from a time perspective and changing the mix of principal and interest in each payment.


"I know the P&I is amortized month by month from the get go. But if an extra payment is made do they recalculate the interest for the rest of the loan at that same moment?

While Lender/Servicer may calculate total projected interest for the rest of the loan period after a principal payment, mechanically, it’s much easier to think of extra principal payments in this way: 1) the interest you pay each month may only be levied against the outstanding principal balance, and 2) assuming you have a fixed loan, your monthly payment will not change; however, the portion attributed to principal and interest will. When you make advance/extra principal payments the interest amount is lower (because the principal amount is lower), and more of the fixed payment goes to principal reduction.


"Or do you have to request it to be recalculated?"

You do not have to request that the amortization be recalculated. However, if you want to keep track of what it should be after a principal payment drop me an email and I'll send you an amortization tool that keeps track.


"I can't find any information on this anywhere."

If you want to make extra principal payments the best thing to do is call the Lender/Servicer and ask when they apply extra principal payments. For example, you may not want to send in a principal payment on the 5th of the month if they will not apply it until the first of the next month.

Now, I do not know your personal financial picture or all your motivations for wanting to make extra principal payments; however, please take a look at the following post as it may provide a bit of an “a-ha” moment: http://www.trulia.com/voices/Home_Buying/What_is_the_differe…

Best, Steve
0 votes
Valerie Basi…, Agent, Chatsworth, CA
Wed Oct 20, 2010
Hello Mehran
Valerie Basile ehre with Prudential CA Realty. I make an extra payment here and there or I add extra monthly to my payment. Yes it has reduced my principle alot and saved me loads of interest. You need to call your lender and ask specific questions only because ever loan is different and the ways the lenders do things are different.
0 votes
Linda S. Cef…, Agent, Franklin, WI
Wed Oct 20, 2010
In my experience it varies from lender to lender. Some put it in escrow until the end of the year but is retroactive to the date the payment was made. Some apply it upon receipt. Some you have to request in writing.

Call your escrow department of the institution that holds your mortgage and ask them.
Web Reference:  http://www.lindacefalu.com
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