Beat Your Lender

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
2002

Over the past few years most of you have been exposed to various repayment plans that are designed to accelerate the pay off of your Real Estate loan. I have devoted previous columns to bi-weekly mortgages and have outlined the simple truth that the bi-weekly plans DO WORK. However there is no MAGIC: you merely pay 13 payments per year instead of 12.

If you listen to the radio while commuting you have probably been exposed to mortgage refinance programs that are amortized over 20 – 25 years instead of the standard 30-year loan. There is a common thread to ALL of these programs and that thread can be easily described in the 2 words that I have been preaching for over 25 years – PAY MORE.

One does not need a structured program to pay more. Most people do not realize that you can OVERPAY your mortgage payment. For instance, if your payment is $1,753.00 you can pay $1,760.00, $1,800.00, or for that matter $10,000.00. Any overpayment will be AUTOMATICALLY reduced from your principal balance and next month you will only be charged INTEREST on the lower balance. As you continue to do this, either monthly or occasionally, the principal balance will continue to drop and your loan will be paid off sooner. Some people prefer to over pay $50.00 – $100.00 each month while others prefer to overpay a larger amount from time to time.

Let’s add a couple of cautions here. Make certain your loan does not have a PREPAYMENT PENALTY. Even if your loan has a penalty, it will PROBABLY allow you to prepay 20% of the principal in any calendar year. Therefore, if your loan has a balance of $150,000.00 you can probably prepay up to $30,000.00 extra. My only other caveat is to “help” your lender. Do not pay EXACTLY 2 or 3 times a regular payment as your lender may assume you are going on vacation and are paying for your September, October, and November payments all at once. I highly recommend that you include a note with your payment that says “apply over payment to principal.” Truly this is not necessary because there is no other way to apply your payment however some lenders will be dumb enough to put the overpayment in “suspense.” Save yourself the hassle and add a 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 pay off will be accelerated. 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.

Peter Rosenthal
VIP Trust Deed Company