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I read this post which answers a reader's question about how her additional mortgage payments were applied to her loan.

A short version of the question: She had been making additional payments on her mortgage, and her next payment is due officially in six months. This means she's been prepaying her mortgage payments instead of applying the additional payments to the loan principal immediately.

A short version of the answer: This isn't the best idea, as it doesn't reduce the amount of interest paid, and the bank holds the money, interest-free, until applying it to the loan balance. It would be best to request that the bank apply the extra payments "properly," or at least make sure that future additional payments are applied to reduce principal.

Use of the word "properly" -- which is what the blogger used in his answer -- bugs me a little bit because it makes it appear that making advance payments has little or no merit. What advantage could there be to "buying time" by getting ahead a few payments? I can't imagine that this argument is quite that one-sided, but I could be wrong! ;)

flag	asked Nov 27 at 9:10 mbhunter♦♦ 2,594●1●2●11

Dr Dean · Accepted Answer · 2009-11-27 15:52:21Z UTC

The only reason I could think of would be if you left the country on a slow boat, and you wanted to make sure your house was still yours when you returned.

The better way to do this would be to have the payments automatically transferred while you are gone.

Otherwise, it just gives the bank use of your money for nothing. Now considering how low money market rates are at this time, all of us with passbook, and money market accounts are essentially doing the same thing.

But from a building wealth and personal finance standpoint, paying down principal makes a lot of sense: being out of debt earlier, and less interest costs are obvious ones.

I can't think of any benefits of pre-paying.

Don't think the mortgage company was doing anything "improper" just what is in their best self interest.....

Funny about Money · Answer 2 · 2009-11-28 02:53:23Z UTC

Interesting question! I actually had my credit union try to refuse to apply a prepayment toward principal. Their rep claimed it was against the CU's rules and that they were required to apply prepayments toward interest (!!).

Because I had paid off a previous 5-year loan in 18 months by applying every extra penny toward principal, I knew this story was a fairy tale. I raised He** and put a block under it, right there in the lobby. To shut me up, they trotted out the manager, who backed & filled and finally admitted that, of course, no rule against prepaying principal existed. As it developed, to discourage customers from doing this, they kept tellers in the dark about it: you had to write a secret code on the check to get it applied to principal. The code is "LOPC." I don't know what it means & don't know if it's exclusive to my C.U.

The C.U. will accept a check marked "LOPC," but it truly is impossible to apply cash toward principal in an electronic transaction.

There's no benefit to prepaying interest, except to the bank, other than that later you can skip a payment if you expect to be short of cash in the future.

What advantages are there to making mortgage payments in advance?

2 Answers