One very important point I never hear discussed is what the lender does with the extra loan payments borrowers make.
If you pay extra on your mortgage before it’s due, does the lender require that the next payment be paid on schedule or can you skip monthly payments corresponding to how much extra you’ve paid?
It would seem that many payoff amounts calculated at some point in the future by the lender might go back to the original recorded security deed and original amortization schedule with the extra payments overlooked.
Is the lender expected to recalculate the amortization schedule each time payments are made in advance? Who keeps track of advance payments and how are they treated in the calculation of interest and principal remaining on the mortgage? How would a homeowner take exception to how the lender records the payment? If the amortization schedule is not followed, how is the interest for income tax purposes reported by the lender?
You always have to make your monthly mortgage payment on time. If you make it too early in the month, it’s possible that the lender will assume it’s a prepayment of the balance owed, will apply it that way, and then ding you for a late payment if you don’t make the regular payment on time. That’s why we always suggest making prepayments separate from your regular monthly payment. You can put it in the same envelope, but use a separate check that is marked “apply to loan balance.”
Reamortization happens when you prepay your loan but you might not hear about it from the lender. If you send prepayments when you have a 30-year fixed rate mortgage, the lender shortens the length of the term of your loan. That is to say, instead of having to pay off the loan over 30 years, your prepayments shorten the length and you pay it off in full after, say, 23 years. But your monthly payment stays the same.
If you have an adjustable mortgage, the lender will reamortize the loan every time the loan adjusts. If you make prepayments on the loan, the lender will adjust the payment every time the loan adjusts.
You should keep track of the extra payments you’re making and you should see that reflected at the end of the year in your statement. (Sometimes lenders will show it on the next month’s statement, but all of the payments should be shown in the year-end statement.) The interest that you pay each year is tracked by the lender and will be provided to you in a 1099 as the next year begins. If you suspect that your lender has incorrect figures, you could hire someone to do an accounting of transactions and figure it out.
And, by the way, the lender should only charge you interest on the amount of money you have outstanding whether it’s an adjustable loan or a fixed-rate loan. The only difference is that the prepayment shortens the length of a fixed-rate and fixed-term loan and a prepayment reduces the monthly payments required on an adjustable loan while the length of the loan stays the same.
Hope this helps.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to Be Wildly Successful in Real Estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.