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Mortgage Tip #1 - Explicitly Write "Principal Only"

We all know that paying a little more principal on your mortgage every month helps reduce the amount you have to pay over the long run. And that's what I had in mind when I cut a check for $3658.63 out to Bank of America this month.

The scary part is that only $2186.95 went toward the principal. The other $1471.68 became monthly mortgage payments for the next seven months, even though I had already set up automatic payment with my bank. Worst of all, the $2186.95 in principal was applied after the seven payments with interest totaling more than $350. Bank of America was basically pocketing 10% on a single day simply by manipulating the payment schedule with zero benefit to me! I was basically making seven payments in advance with full interest!

Wow! Did they think I was going to let that slide?

After calling their mortgage department, the polite lady on the line said she would change the payment to principal only, which will take effect within 24 hours. She recommends that I write "Principal Only" on the check in the future; otherwise the bank could apply my principal payment as future monthly payments (looking out for themselves). After this experience, I'd have to be more careful how I send in extra principal payments.

Chieh Cheng
Tue, 05 Dec 2006 19:08:53 -0800

Thanks. It's very good advice.

Since I barely make my mortgage, I never realized this principal issue.

Good to know.

Thanks.

Paul
Tue, 05 Dec 2006 19:40:43 -0800

you guys didn't know about the principal only thing?? then you might not also know that most mortgage banks allow you to pay twice a month instead of once a month. i think BofA calls it Equity Accelerator. so you pay the same amount every month, except that it's split into two payments. the bank gets half your money sooner so they can use that to leverage their investments with it and you get 2 weeks of interest shaved off half the amount, so you actually end up paying off your 30 year loan like 7 years faster or so. win-win.

charlie
Thu, 07 Dec 2006 10:50:29 -0800

Excellent...forgot about that...but in essense, you end up paying one or two extra months of mortgage a year. I'm sure it's only one.

I think it's every other week or something...that's how they work out the schedule.

Paul
Thu, 07 Dec 2006 11:00:01 -0800

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