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Automatic Payment Program...BOA..


simplysilky
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BOA is giving me a choice of days for the Automatic payment program--the 1st thru the 10th. I was thinking about the 10th, because then 5 days later, dh and I get paid again. Is paying the mortgage on the 1st, the norm? If I pay on the 10th, will there be any interest accruing, even though it wouldn't be considered late? (Not sure if I asked that right, please forgive me)

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You are charged interest every day on the loan balance amount. So, long term, you are going to pay off your loan faster if you pay on the 1st. (don't pay earlier than that as you may confuse them - they want a check from you every month)

You are not forced to pay any extra however, unless you go past the 15th-at which time you will be charged a penalty that is normally 5% of the payment.

If you want to pay off your loan faster, some banks will let you pay extra towards principal in any amount you want. Some banks will only allow full payments to be paid towards principal (so if you send them 100 extra per month they may only credit you when you get to 1200 extra in your account)

Charles

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If you pay later than the 1st, ADDITIONAL interest will accrue on the portion of money that is covered by your payment. The interest on the rest of your balance was going to accrue anyway. So if you pay on the 5th and your principal + interest payment is $1000 and your rate is 6%, then you have been "penalized" by: (4/365) x $1000 x 0.06, which is 65 cents. Not that much to worry about, but when compounded every month over 30 years could become a real sum of money.

I pay by automatic withdrawal on the first of every month. It is great (it should be free). Also, I've chosen to pay 1/12th additional every month which is applied instantly to reduce the balance. When you work the amoritzation schedules, it is amazing what a small unmissed additional payment every month does to the loan balance over time. I recommend it as long as: a) it is free and B) they apply to your balance instantly and not hold it until you accrue an amount equal to one payment amount.

Basically, I second what Charles said.

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I once had a friend that wanted to be able to make payments based on 30 years amortization, but wanted to pay off her loan in less than that time. We did the math and when she refinanced took out an additional 5,000. That was applied to her loan shortly after the loan was funded. It took off about 10 years of the repayment time. Her goal was to pay extra on the loan every month and has done so over the years but hard for her to always pay extra.

There are a lot of amortization tables on line that you can play with and the results are amazing, both if you delay your payment until the 15th and if you pay an extra 100 or so in the early years of the mortgage.

Charles

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  • 2 weeks later...
I once had a friend that wanted to be able to make payments based on 30 years amortization, but wanted to pay off her loan in less than that time. We did the math and when she refinanced took out an additional 5,000. That was applied to her loan shortly after the loan was funded. It took off about 10 years of the repayment time. Her goal was to pay extra on the loan every month and has done so over the years but hard for her to always pay extra.

There are a lot of amortization tables on line that you can play with and the results are amazing, both if you delay your payment until the 15th and if you pay an extra 100 or so in the early years of the mortgage.

Charles

Not sure how borrowing an additional 5,000 and then paying it right back to principal helped any. Curious as to why you think it made a difference versus not taking any extra out at all.

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So you're saying you pay a full mortgage payment on the 5th and another full payment on the 15th? Or is it split? I don't have it that good, wish I did!!

She's saying that she pays 1/2 of the mortgage on the 5th and the other 1/2 on the 15th. Actually, you don't have to have this set up with your bank, you can do it yourself.

Check out this thread, where we were just discussing this very issue.

http://debt-consolidation-credit-repair-service.com/forums/showthread.php?p=831602&posted=1#post831602

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Not sure how borrowing an additional 5,000 and then paying it right back to principal helped any. Curious as to why you think it made a difference versus not taking any extra out at all.

The $5,000 was applied directly to principal, which in this case would have been enough to advance her along in the amortization table to take ten years off of her mortgage. Since she was early in the mortgage, the principal amounts were much smaller, and the interest amounts much higher. By a rule of thumb on any type of loan, 78% of the interest is paid during the first half of a loan, and as time progresses less interest is paid and more principal is paid.

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The $5,000 was applied directly to principal, which in this case would have been enough to advance her along in the amortization table to take ten years off of her mortgage. Since she was early in the mortgage, the principal amounts were much smaller, and the interest amounts much higher. By a rule of thumb on any type of loan, 78% of the interest is paid during the first half of a loan, and as time progresses less interest is paid and more principal is paid.

Yes but in both your solution and my solution, the amount of principal is identical. How does borrowing 5K and paying it right back change anything. Explain.

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The $5,000 was applied directly to principal, which in this case would have been enough to advance her along in the amortization table to take ten years off of her mortgage. Since she was early in the mortgage, the principal amounts were much smaller, and the interest amounts much higher. By a rule of thumb on any type of loan, 78% of the interest is paid during the first half of a loan, and as time progresses less interest is paid and more principal is paid.

Dude, I'm an industry pro. This aint right.

Let's assume a $200,000 fixed rate, 30 year mortgage at 6%.

Your scenario: Borrow $205,000 and make an immediate $5,000 payment on the principal.

205K5K.jpg

It takes three years off, nowhere near 10.

My scenario: Do nothing. Borrow $200,000.

2000.jpg

As you can see, by borrowing an additional $5,000 and paying it back, you've saved about $15,000, but only over the life of the loan-30 years. If you look at total payments, the difference is only $10,000. Lets ignore the fact that that average time anyone keeps a mortgage is between 1.5-3 years for the moment.

The real point is that it takes only three years off, NOT 10, and increases the payments by $30 every month.

If you can show me, using a 30 year fixed mortgage at 6%, and a loan size of at least $50,000, how borrowing 5,000 and paying it right back (according to your post) will cut ten years off, I will mail you a check for 200 dollars.

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She's saying that she pays 1/2 of the mortgage on the 5th and the other 1/2 on the 15th. Actually, you don't have to have this set up with your bank, you can do it yourself.

Check out this thread, where we were just discussing this very issue.

http://debt-consolidation-credit-rep...d=1#post831602

I was told by my bank that I'd have to set this up, otherwise, it would go as an extra principal payment and not the monthly payment. They only accept the full amount and not partial payments. So doing this on my own won't work. :(

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Yes but in both your solution and my solution, the amount of principal is identical. How does borrowing 5K and paying it right back change anything.
Exactly. People get messed up when they see amortization schedules, as if the majority of early payments are applied to interest at the discretion of the bank. As you know, the majority of the payment is allocated to interest solely because the principal balance is much higher at the beginning. I've heard this misinterpretation often- mostly as red herring arguments to bolster IO loans in the form of, "almost all of your payments in the first 5 years go to interest anyway...so why make the bank rich?" It defies logic.

Principal if principal and it accrues interest at a constant rate until you pay it down. Period. Taking extra money out and then paying it back serves absoluely no purpose other than to tack on a small amount of additional interest until the $5k lump sum is made. Then you are back to square one again- the place you would have been had you not borrowed the extra sum.

In other words, don't borrow any more than you have to. It doesn't help squat.

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She's saying that she pays 1/2 of the mortgage on the 5th and the other 1/2 on the 15th. Actually, you don't have to have this set up with your bank, you can do it yourself.

Check out this thread, where we were just discussing this very issue.

http://debt-consolidation-credit-rep...d=1#post831602

I was told by my bank that I'd have to set this up, otherwise, it would go as an extra principal payment and not the monthly payment. They only accept the full amount and not partial payments. So doing this on my own won't work. :(

Set aside half of your payment yourself in an ING account or other high interest checking (my bank on the corner pays 4.01apr on checking with no fees). That way you are richer by the interest amounts that accrue and you get the same effect of segregating half of your payment semi-monthly.
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Then you are back to square one again- the place you would have been had you not borrowed the extra sum.

In other words, don't borrow any more than you have to. It doesn't help squat.

THANK YOU!

I am glad someone can see reason.

The one thing that truly irritates me is when people act like experts when in reality have no idea what they are talking about. When confronted by cold hard evidence, they have no response?

I am a loan officer. I know my products and my programs like the back of my hand. I'm not a CPA, so I don't give tax advice. Though I'm more qualified than most realtors, I don't practice real estate, so I don't offer advice. I'm not a lawyer, so etc etc.

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Set aside half of your payment yourself in an ING account or other high interest checking (my bank on the corner pays 4.01apr on checking with no fees). That way you are richer by the interest amounts that accrue and you get the same effect of segregating half of your payment semi-monthly.

Great Idea! Now why didn't I think of that!!! 8-)

I've actually thought about opening an ING in the past for other reasons but I think you've actually motivated me to do it! Thanks jq...

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I have ING and I love it, but there are others that have higher yields now. emigrant, HSBC, GMAC, etc. In any case, remember to adjust for the day or two that it takes to withdrawal money out so that you don't bounce a check...that would likely undo your gain for the year.

Two weeks before the end of the year withdrawal your accrued balance and make a payment on your mortgage. Or better yet, throw it into an IRA and then deduct that amount on your federal income tax.

Good luck!

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Dude, I'm an industry pro. This aint right.

Let's assume a $200,000 fixed rate, 30 year mortgage at 6%.

Your scenario: Borrow $205,000 and make an immediate $5,000 payment on the principal.

205K5K.jpg

It takes three years off, nowhere near 10.

My scenario: Do nothing. Borrow $200,000.

2000.jpg

As you can see, by borrowing an additional $5,000 and paying it back, you've saved about $15,000, but only over the life of the loan-30 years. If you look at total payments, the difference is only $10,000. Lets ignore the fact that that average time anyone keeps a mortgage is between 1.5-3 years for the moment.

The real point is that it takes only three years off, NOT 10, and increases the payments by $30 every month.

If you can show me, using a 30 year fixed mortgage at 6%, and a loan size of at least $50,000, how borrowing 5,000 and paying it right back (according to your post) will cut ten years off, I will mail you a check for 200 dollars.

First let's make it clear that a professional is defined as someone who receives compensation for the work that they perform. Hence, there are actually professional garbage collectors, or sanitation engineers, as well as "mortgage industry pros."

Secondly over the past several years the mortgage industry has become full of SALESMEN or SALESWOMEN, whose primary job is to sell. No real compassion to do what is right, just SELL the loan. It's really hard to tell a potential customer that a refinance may not be in their best interest and kiss away a potential $3,000 to $5,000 paycheck (and in many instances much more). But the true INDUSTRY PRO can and will do so.

Now to the real heart, countless times on this board, it has been suggested on 100% purchases, that the least expensive (payment wise) for the buyer to obtain would be what is known as a combo loan. A combo loan is where there is a first mortgage at 80% of value (to get the best rates), and a second mortgage is also obtained to cover the remaining 20% of the loan. The second mortgage always carries a higher interest rate, because there is more risk to the lender. The real mortgage pros, as well as the prepay financial gurus will almost always suggest paying off the higher interest rates first (the second mortgage).

Now to the real heart of your slam saying that Charles is full of it, and there is no way that $5,000 prepayment cannot possibly knock down 10 years off the mortgage life, you are absolutely wrong. As a matter of fact I can almost depict the ideal situation where Charles giving his sound advice would make this scenario reasonable. It would have been on a second mortgage, which often times are sold as a 30/15 product, where the mortgage payment is based on a thirty year amortization, but due in 15 years. And I can also almost hear Charles smooth, knowledgeable PROFESSIONAL demeanor discussing these options with his borrower.

ABSOLUTELY NOWHERE DID CHARLES MENTION 6% INTEREST.

Without further ado, here is a prime example of how this would work:

Results

$47,434.00

Remaining Balance

Loan Amount $50,000.00

Interest Rate 13.500%

Payments Made/Total 120/360

Monthly Principal & Interest $572.71

You should carefully notice that there are 120 payments made (ten years), and also note that after ten years there has only been $2,566 paid towards principal, therefore a $5,000 dollar lump sum payment on this scenario would have easily reduced ten years off the mortgage life.

You have gained a bit of free professional mortgage advice here. Something that was never even taught while obtaing your mortgage certificate to sell mortgages, to enable you to become an INDUSTRY PRO, but should have.

P.S. I am right. No check is necessary, unless you want to donate to one of Kristy's charities, or to help support this free board.

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I'd like to make a few points. I will ignore your implied slur that I am nothing but unethical "salesperson" who doesn't know his head out his a$$.

Now to the real heart, countless times on this board, it has been suggested on 100% purchases, that the least expensive (payment wise) for the buyer to obtain would be what is known as a combo loan....

First off, I am well aware of the terms and industry jargon to understand your point here. No need to break down the mysteries of a junior deed of trust here, trust me. More to the point, you are critically out of date. Due to the recent changes in the secondary market, doing 80/20 combo loans is essentially gone. You must have a minimum of a 700 score, with fully documented income to obtain said financing, and even with a 800 score the best rate you can hope for is well into the 12% range. I am not saying it is a bad idea to pay down the loan. I am merely disagreeing in the way it is being suggested. In fact I support paying down any debt with a higher interest rate than you can achieve in a money market or online savings.

Now to the real heart of your slam...you are absolutely wrong...30/15 product, where the mortgage payment is based on a thirty year amortization...Charles smooth, knowledgeable PROFESSIONAL demeanor discussing these options with his borrower...ABSOLUTELY NOWHERE DID CHARLES MENTION 6% INTEREST

To be blunt with you, your tone comes off as patronizing. Surely you can't have a bias, with your first name basis with the other poster, and with my arrogance and obvious youth, yes?

I concede that I brought up the 6% thing...However, you cant very well answer any mortgage problem without an assumed interest rate, and no example was given. So, I used a theoretical, fair interest rate for a mortgage and attempted to solve the qandry. Is this not a fair approach?

here is a prime example of how this would work:

Results

...

You should carefully notice that there are 120 payments made (ten years)...reduced ten years off the mortgage life.

Let me see here, put on the thinking cap..Egads! You're showing loan payoff in year ten of a 50K loan at 13 and some change interest.

DING DING DING You have given a scenario where borrowing 5K and paying it back actually does pay off the loan faster than 10 years. However, you didn't meet the guidelines of my challenge (6%), so no money will be going to anybody yet. I agree that 6% is rather arbitrary, but I gave a very small loan size, one that is practically non-existent here in good old high cost CA. See here is the thing, in the scenario I set, this thing cannot be done.

I note also you didn't actually calculate it out to see if it would work (i did), you just made an assumption.

And also, regarding your chosen rate, in CA at least, the maximum allowable interest rate allowed is 12.75. So, 13.5% would have limited reality value.

You have gained a bit of free professional mortgage advice here. Something that was never even taught while obtaing your mortgage certificate to sell mortgages, to enable you to become an INDUSTRY PRO, but should have.

Tsk, tsk. How quickly you prejudge me!. If you examine my post history you will note A. I have not spent much time here at all and B. I have never posted and asked a mortgage related question here. I came here to fill my brain with the inner workings of credit repair, something I am an admitted novice at. I came to this section with the intent of relating some of my experience, IOW giving, not taking.

Please explain what a "mortgage certificate to sell mortgages" is? In California and most other states it is not a legal requirement to obtain any licensing at all in order to be a loan officer. it is encouraged but not required.

It also may interest you to know that I do hold a CA real estate license. Though I am not required to have one and do not practice as a realtor, I hold it as extra accountability to my clients, and towards my goal of a Broker's license. I also have a degree in Real Estate. And though i have only been in the business for the relatively short time of three years, my clients seem to like me because I close one or two referral deals each month.

In closing, if you want to dispute my math, bring a fully explained example and we'll discuss it civilly. But drop the rhetoric and please don't condescend. I am highly trained and educated and I excel in what I do for a living. They say that worst spot to kick a man is in his pride, so there you go.

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Without further ado, here is a prime example of how this would work:

Results

$47,434.00

Remaining Balance

Loan Amount $50,000.00

Interest Rate 13.500%

Payments Made/Total 120/360

Monthly Principal & Interest $572.71

You should carefully notice that there are 120 payments made (ten years), and also note that after ten years there has only been $2,566 paid towards principal, therefore a $5,000 dollar lump sum payment on this scenario would have easily reduced ten years off the mortgage life.

Sorry to intrude but I still can't figure out how a lump sum payment upfront takes 10 years off a mortgage. The lump sum of cash has to come from somewhere. And if you are borrowing more inside of the mortgage for the purpose of pre-paying the same mortgage, you can just borrow $5k less and be in the same position from the start.

Where am I going wrong here? I have a few mortgages going on currently and may be picking another up in the next year. I think this point is important.

The only scenario where I see this is helpful is to borrow MORE than you need in total so that the 80% loan (lower apr) has free cash available to make a lump sum payment on the 20% loan (much higher apr loan). That way, you have effectively lowered the rate over the life of the loan. Otherwise, you have just borrowed more funds and accrued more interest. No?

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It saves you long term money in that the loan term is reduced. Once you have made the large initial payment, more of your money is going towards principal every month. That gets compounded every month as you are actually being charged every day for the amount of principal you owe, you just don't pay it until the first a month.

Charles

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Charles, please don't think I am being argumentative, but this is pretty fundamental so bear with me.

The larger beginning balance is reduced by the lump sum payment. You are then back to the original sum of money that would have been borrowed had you not borrowed the additional sum. At that point, you are saying that the monthly required payments are applied more to principal and less to interest. This is true, but not because of the lump sum payment, but because your required monthly payment is larger than it would have been had you not borrowed the additional sum. This additional monthly payment portion is what speeds up your amortization, not the lump sum payment.

So, WITHOUT borrowing the additional sum, making the lump sum payment upfront, and having larger required payments every month, this can be achieved by making slightly larger monthly payments VOLUNTARILY on the loan balance where you do not borrow additional funds (to have an identical amortization schedule as above, set your payment amount to what would be required if you borrowed $5k extra). This will also speed up amortization and reduce the principal at the exact same rate. The two situations are financially equivalent, except that you have the option not to make a larger payment in the situation where you only borrow what you need. I realize that making voluntary additional payments takes discipline, but it also allows one to NOT make the additional payment amount if money is tight for a month or two.

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Jq26 is correct. The scenario discussed makes about an 10% increase in the payments over the life of the loan. if you simply add that monthly extra onto the same loan it is the exact same effect. Observe:

vsvsvoila.jpg

Not quite the same actually, you pay about $1,000 more in total interest in the right hand scenario.

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Think more about a bonus check, tax refund check, or other lump sum that will be coming after closing the loan, or other funds that may not have been available at the time of closing.

Oompaloompa, I was not implying at all that you are unethical or the like. Reality is that the industry is rampant with the greedy ones, as well as some of the companies which train them. Does anyone remember Ameriquest? It won't be long until regulation forces them out, and back to used car salesmen. Sorry if you took it that way.

Even at the rate cap of 12.75%, it would still work out that ten years would be eliminated. it is also quite possibly true that this scenario occured before the subprime meltdown. Also, not everybody lives in California, so a $250,000 purchase would still be very likely in other parts of the country.

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Two weeks before the end of the year withdrawal your accrued balance and make a payment on your mortgage. Or better yet, throw it into an IRA and then deduct that amount on your federal income tax.

jq26, that is EXCELLENT advice. I too have an ING savings account. That's the very reason we opened one to save money through the year and then open an IRA with it.

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