Understanding how mortgage prepayment works

Q: I have a 15-year mortgage that I have been making an extra payment on annually so that I can pay it off early. I made my first payment in July 2003. My lender has told me that it will be paid off in November 2016. I expected it to be paid off in July 2015.

I have my payment history and would like to dispute the payoff date. My question is, should I hire an accountant to go through the math with me, or do you have another suggestion?

A: We don’t think you need an accountant. But there is some missing information that could help. If you have an escrow with the lender, the first thing you need to determine is whether your extra payments went toward paying off your loan and not into your escrow payments.

Second, have you computed your prepayment history correctly? Consider using a mortgage prepayment calculator to go through your numbers. You also need to know that your lender may apply your each of your prepayments differently. Depending on how and when you sent in your checks, the additional amount you paid may have been credited to your next payment due and not toward paying down the balance of your loan.

If you have your year-end statements for the loan for the last 10 years, you should verify the year-end balance. You can compare the amount in the statement with the amount on an amortization table to determine whether the bank has credited your payments properly to your account. If you find a discrepancy along the way, you might have found the problem.

Assuming your monthly payment is $1,000 and you made 10 extra payments, you’d expect that your loan balance would be at least $10,000 lower on an amortization table. There are amortization tables available online that can assist you in computing your prepayment amounts. BankRate.com has a simple mortgage calculator where you can input your loan information and include a fixed month every year in which you make an extra loan payment. The amortization schedule will then tell you how much earlier you would pay off your loan.

Based on the information you sent us, we came up with the same date of November 2016 for your early payoff of your loan. Keep in mind that the earlier you sent in your prepayments, the more of a benefit you get out of them. If you sent in your first prepayment when you took out your loan, you have paid at most 11 extra payments. With those payments, you probably have shaved about a year and a half off the length of your loan.

First, verify your numbers. Then use a mortgage calculator to approximate when you made your yearly prepayments and see what result you get. Compare that information with the information your lender has and go from there.

Source: http://www.chicagotribune.com/classified/realestate/sns-201310251930–tms–realestmctnig-a20131101-20131101,0,1251051.column

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