Why Can't I Avoid Late Payments and Bad Credit by Paying My Mortgage Early?
By Gina PogolMortgage Credit Problems Columnist
Angry Homeowner Asks: Dear Gina, I am furious at my lender! I was going out of town and didn't want to miss next month's mortgage payment (I used to have bad credit and have been trying to clean it up). I sent in two payments--one for August and one for September--and then I left town, thinking my mortgage was paid for two months. But those guys took payment number two and put the whole thing toward my principal! And then in September they showed my payment as missed! I can't get them to fix this! Why?
Gina Says:
Dear Angry,
I am very sorry about this misunderstanding and commend you for your credit cleanup efforts. The issue here is that your lender can't legally hold your payment until the next month, and is required by law to apply it toward your principal balance.
What Happens to Extra Mortgage Payments?
Extra payments are taken off of the balance due and interest is calculated on the remaining balance. Once an extra principal payment is made, more of your next payment is applied to the principal, speeding up your mortgage repayment and lowering the amount of interest paid over the life of your loan.
Why Can't You Make Extra Mortgage Payments Now and Skip Payments Later?
So why can't you pay your mortgage ahead of time? It's because your loan agreement stipulates that you can prepay the loan any time without a penalty. If you send in an extra payment, the extra must be applied to the principal and the interest on the next payment due must be calculated on the resulting lower balance. The lender does not have the option to wait and apply the payments in the future and you don't get to "skip" payments.
Fixing Mortgage Principal Reduction Mixups
Now, practically speaking, I'm going to assume that you don't have an extra month's payment sitting around and waiting to be mailed in. Your best bet in that case is to ask your servicer for help--the missing payment can be added to the loan balance and the loan's term extended one month. Because you aren't really behind, you are back to where you were except for applicable late fees and service charges. You will have a late payment on your credit history unless you take care of this within 30 days of the due date--or the mortgage servicer can be persuaded to remove the late payment.
To avoid this occurrence in the future, consider automatic payments from your checking account, and automatic payroll deposits from your employer. That way you can avoid bad credit and missing your mortgage payment. And if you want to pay your mortgage down faster and automatically, consider setting up a bi-weekly mortgage option--you make half your monthly payment every two weeks. On a $300,000 mortgage at 5%, you could pay your loan off 57 months sooner by paying this way.
Gina
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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