Wednesday, May 04, 2011

Making Sure Extra Mortage Payments Go Towards Principal

There was an interesting post on the Consumerist blog this week that warned consumers trying to make extra payments towards the principal balance on their home mortgages. The post cautions folks to contact the bank (in this case Wells Fargo) each time they make an extra mortgage payment to make sure that the amount goes towards paying down the existing principal balance, and not future interest. Yes, there are cases when some folks may choose to get ahead on their payments by paying both future interest and principal (such as seasonal or contract workers). But most folks who pay extra on their mortgage usually want the amount to go towards principal in order to reduce the life of the loan and increase savings in the long run.

It depends on the loan contract, but apparently, if you don't specify, it is the default action of most financial institutions to automatically apply the payment towards future interest and then principal whenever they receive a payment over the normal monthly amount.

But what about biweekly draft programs with your bank? I'm enrolled in a biweekly draft program on my mortgage, which reduces the overall life of the loan by several years. I contacted the bank to get more specifics of how the extra payment is applied.

I received the following response from a customer service representative:
When enrolled in our biweekly drafting program, [we] automatically draft half of the monthly mortgage payment from your account every fourteen days. As we are unable to apply partial payments, the funds are deposited into a holding account known as "suspense". Upon receipt of the second draft, the full monthly payment is applied and credited to the account.

Twice each year, there will be three half-drafts within a single month. Once the loan is paid ahead, the additional half-payment is applied to the outstanding loan balance, reducing principal and saving interest charges on every subsequent loan payment.

The biweekly drafting option is the same thing as sending in one additional payment amount per year to be applied as a principal-only payment. We offer the biweekly drafting program to provide our homeowner's the convenience of having the payments deducted. However; if you prefer to manage your payments on your own, you definitely can.
I sent a follow-up email to clarify and received a reply along with an amortization schedule that confirms that the biweekly setup does provide one automatic extra payment straight to principal every year.

Any other loan tips or strategies? Please leave a comment.

4 comments:

Tesh said...

I looked at the biweekly program years ago, and while the initial paperwork wasn't so refreshingly honest, that "one extra payment per year" was what it ultimately amounted to, something I noted after a little investigation.

As such, we just pay a bit extra toward the principle when we can (and we follow up to make sure they actually apply it properly). The biweekly program actually cost money to be enrolled in, and it would have taken about 7 years to get ahead of the cost of the program with savings from using it.

Chipping away at the principal on our own schedule made a lot more sense.

Brian said...

Interesting. I don't think we pay anything to the bank to be enrolled in the biweekly program. Thanks for the comment!

Anonymous said...

Wells Fargo calls every day demanding a payment one month in advance of the regular payment, or threatens to sell the home. The Original down pmt. of $100,000 got lost when they rewrote the contract and extended it to 40 years with a balloon pmt of $75,000!! I haven't signed or seen a single paper to sign, it's all on the phone. When I questioned them putting the money in a suspense account, they couldn't say why. Tired of daily phone harrassing & threats of selling my home. My local bank said they cannot help.Where do I go for help??? I've been in the home 4 years

Anonymous said...

Be careful Brian and anyone else reading this! Wells Fargo advertises ways in help sections & elsewhere of its websites methods for making principle balance only payments from both Wells Fargo bank accounts and non-Wells Fargo bank accounts. This is not true!! It only allows you to apply future payments of already scheduled payments. If you meet with them in person and specify you want to make a principle balance only payment their system again calculates it as a regularly schedule interest payment. We've had two mortgages with them now five years and I've attempted to make principle balance only payments numerous times in the past and all have failed. When I call no matter who I speak with or how many times I raise the concern this keeps happening and nothing ever gets done. Its clear to me their practices are deceptive and intentionally designed to stretch every loan out the entire duration so they get every penny of interest. In my opinion each and every one of you should get as far away from them as possible. If you can't save the entire amount up in a savings account elsewhere and go to one of their branch offices with an attorney and make one large final payment. Get proof of everything! I don't see this problem going away until the federal government seizes their stuff and forces them to provide alternative options for consumers. I just read on CNN the SEC has subpoenaed executives from Wells Fargo because of their lack of cooperation in handing over documents for various loans with some accounts and I must say I'm not surprised the SEC is having trouble. I hope their investigations produces results and is able to provide solutions for consumers who have mortgage balances being held hostage by this evil and greedy blood sucking bank.

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