Beat Your Lender

I’m sure you have heard adverting for mortgage refinance programs that are amortized over 10-15 years instead of the standard 30-year term. There is a common thread to all of these programs and that thread can be easily described with the two words that I have been preaching for 40 years – pay more.

One does not need a structured program to pay more; just do it. As an example, if your payment is $1,753 per month you can pay $1,760, $1,800 or even $10,000. Any overpayment will be automatically deducted from your principal balance and next month you will only be charged interest on the lower balance. As you continue to do this, the principal balance will keep dropping and your loan will be paid off sooner. Some people prefer to overpay $50 – $100 each month, while others prefer to overpay a larger amount from time to time.

A couple of cautions: make certain your loan does not have a prepayment penalty. Even if your loan has a penalty, it will probably allow you to repay 20% of the principal in any calendar year. Do not pay exactly two or three times a regular payment as your lender may assume you are going on vacation and are paying three months in advance. I recommend that you include a note with your payment that says “apply overpayment to principal.” This is not necessary because there is no other way to apply your payment; however, some lenders will just put the overpayment in “suspense.” Save yourself the hassle and add the note.

One last thought. I am often asked if making a large prepayment will result in a lower monthly payment. No, your payment will stay the same but a larger portion of your monthly payment will be applied to principal and, again, your loan will be paid off sooner. If you are internet friendly, you can easily run a sample loan amortization schedule using your regular payment and then another schedule with your payment plus $100, plus $200, etc.

Send questions to the V.I.P. at P.O. Box 26, Montrose, CA 91021 or email peter@viploan.com.