Those of you who try to prepay your mortgages, beware! Below is a story from one of our readers that may make you proceed with caution from here on out. In short, every time her mortgage is prepaid, there is a problem; the bank applies the payment to the future interest instead of the existing principal. The future interest is calculated based on the current principal, so that means they’re having our reader paying extra interest that would have otherwise never accrued if they had subtracted her payment correctly!
All in all, if prepaying your mortgage gives you peace of mind and investing in your emotional satisfaction is more important than the financial benefit, go for it. It’s kind of like a conservative investment. Just keep the story in mind. She writes:
I have had a mortgage with Chase for nearly 6 years now and in that time, I have been able to cut the principle owed by about half by paying a little extra out of pocket each month with larger lump sums as my budget allows. The extra money put down was always applied to the principle until I made an extra $20,000 principle payment a year ago, paid at the same time as my usual principle and interest payment. Peculiarly, Chase decided to apply nearly $2000 of the extra payment to principle and interest for following month (due date 36 days away). This interest added into that extra payment, but was calculated without the extra $20,000 removed from the principle.
Fortunately, the funds were reversed when I called them out on it and the $20,000 was appropriately applied entirely to the principle. The amount of interest initially paid as part of the extra monthly payment was $1368.16. When I paid one month later (and interest had accrued on my principle, now $20,000 lower), the amount paid to interest was only $1,240.66. Had I not forced them to apply the extra payment completely to principle, Chase would have “earned” an extra $127.50 of pure profit.
Moving forward more than a year later, I was fortunate enough to be able to pay another $50,000 toward the principle. I made a very large payment of $50,000 plus the usual monthly payment 13 days early, figuring that 13 days of interest on $50,000 was worth saving. Last week, I received the statement showing credit for an extra monthly payment (not due for 45 days), again effectively having me prepay a month’s worth of interest that would never otherwise accrue on that $50,000. The interest charged for the extra month was $1095.20. When I pay next month on a principle balance $50,000 smaller, the interest would be $779.90. Again, Chase tried to charge me an extra $315.30 interest on money that I no longer owed them.
Each time, my bank has been good about reversing these charges and applying the payments correctly, however I am certain that they are relying on most people to not realize that they are being scammed out of a month’s worth of interest on the extra payment if some of it is applied to their next payment more than a month in advance. Be careful, and make sure to double check your statements.
At Consider The Consumer we believe that this is pretty common occurrence with all kinds of loans, across all banks, so we urge you to check your statements carefully after prepaying, and call the bank immediately if it looks like they applied your extra payment to future interest instead of paying down the principal.
If something like this has occurred and has hurt you financially, please contact us and we will do our best to right this wrong and spread the word. If it has affected you, there is a very good chance it has affected many! Please do not keep this quiet, let’s try and expose this scam!