Berkeley CSUA MOTD:2013:March:09 Saturday
Berkeley CSUA MOTD
2013/3/9-4/16 [Finance/Banking] UID:54621 Activity:nil
3/9     In a 15/30 year loan, the amount of payment stays the same but
        the payment on interest decreases while the principal increases.
        Suppose I decide to pay off a huge chunk of principal, will
        the amount of interest I need to pay decrease drastically, or
        do banks still want to take out a huge chunk of interest rate?
        \_ You don't actually have separate "interest" and "principal"; you
           just have a balance.  Every month your balance goes up because
           they charge you interest (a percentage of your current balance),
           and it goes down when you make payments.  So yes, if you make
           a big payment, your balance will go down and they'll be adding
           less interest each month.
           \_ This is not entirely true.  When you make extra payments, or
              when you make a bigger payment than the usual amount, you should
              specify that the extra money should be applied to the principal.
              Otherwise, the bank is free to interpret that you intend to
              apply it to either the principal or the interest, and most banks
              Otherwise, the bank is free to interpret whether you intend to
              apply it to the principal or the interest, and most banks
              will apply it to the interest since it is to their advantage.
              The difference is that: when you apply it to the principal, your
              remaining principal (i.e. "balance") goes down and the bank will
              charge you less interest.  When you apply it to the interest,
              your remaining principal remains the same and the bank will
              charge your the same interest, and you're just paying your next
              month's or next-next month's interest extra early.
              \_ Wait, really?  You're saying when I send the bank a big check,
                 instead of crediting it to my account (which would reduce
                 my balance), they might just hold it in limbo and credit it
                 months later?  How is that legal?  I guess I'm glad my bank
                 doesn't do that.
                 \_ I tried paying off a HELOC (it was only $15K). I owned
                    something like $12312, so I wired in $12312. The next
                    month I still got a principal to pay and I was like, WTF?
                    It turns out that they put in $12112 into principle
                    and then put in ~$200 into next month's interest rate, and
                    when time comes to pay, I still owe them principal!
                    FUCKING sneaky Bank of America.
                 \_ No, they will cash it and credit it to your mortgage
                    account right away.  But they will consider it an early
                    interest payment instead of a principal payment unless you
                    specify that it's a payment towards the principal (e.g. by
                    checking a checkbox on your payment stub, or by writing
                    "payment towards principal" on your check.)  If you use
                    automatic payment, you'll need to specify that in the
                    automatic payment authorization form.
                    \_ Wow, that's pretty sleazy.  Thanks for the explanation.
        \_ This is an amortized loan. If you pay off principal then you
           will pay your loan off faster but your payment is fixed. I am not
           really sure what your question is.
           \_ What do you mean by "your payment is fixed"?  You can pay as much
              as you want each month (above the minimum), and if you make big
              payments, you'll end up paying less in total.  (Banks hate this,
              which is why they sometimes have prepayment penalties.)
              \_ i think the op means "the minimum is fixed"  -!op
Berkeley CSUA MOTD:2013:March:09 Saturday