Extra Mortgage Payments - Interest or Principal? (Wells Fargo, pay, credit)

[ChiGuy2.5]

Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?

[ncole1]

Originally Posted by ChiGuy2.5

Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?

1. Not towards pure interest, but towards future scheduled payments. If you pay toward principal only, then you have to make the full payment next month. OTOH, paying future scheduled payments gives you the flexibility to "skip" a payment if needed without incurring late fees or a credit hit.

2. Interest is charged on the outstanding principal balance. Any money not applied to principal thus does not reduce the cost of interest.

3. Yes, provided you have at least 6 months of bills held in an emergency account.

[MrRational]

Originally Posted by ChiGuy2.5

I am currently applying my extra money towards the Principal amount
1) Why would anybody pay extra towards interest?

When I saw the thread title I was worried that someone didn't get it.

3) Given my goal of trying to avoid paying for PMI
is allocating my extra money towards principal a good idea?

Only other way is waiting for market values to rise enough to up the equity.

[Jeo123]

Originally Posted by ChiGuy2.5

Hello All,

I am currently throwing extra money at my mortgage payment since I currently pay PMI. I would like to refinance within the next year and hopefully have enough equity that I don't need to pay a PMI anymore.

In my case I am currently applying my extra money towards the Principal amount, however I do have the option to put it towards interest.

Here are my questions:
1) Why would anybody pay extra towards interest?
2) Wouldn't paying extra towards interest mean that you are being charged extra interest on the principal that still exists? Whereas if you applied extra payments towards principal there is less principal to charge interest on.
3) Given my goal of trying to avoid paying for PMI, is allocating my extra money towards principal a good idea?

The only time I can ever think that paying extra towards interest makes sense is if you're not going to be around to send a check. Let's say you were going out of the country for 2 months. You could prepay your mortgage essentially. With the common use of auto draft, i'm not sure why anyone wouldn't just use auto pay, but some people still like to write the check each month. (Note: I'm assuming that would work, in reality I've never paid extra towards interest, nor would I ever, this is just about the only stretch scenario I can come up with. In practice, I think it's more of a "gotcha" tactic by the banks)

But for you, you're definitely looking to pay towards principal, because the situation is exactly as you described it. The principal that still exists continues to generate interest.

For PMI, you need to get your outstanding balance below 80% of your property value, so yes, principal is what you're trying to pay down.

[KaraG]

Originally Posted by ncole1

1. Not towards pure interest, but towards future scheduled payments. If you pay toward principal only, then you have to make the full payment next month. OTOH, paying future scheduled payments gives you the flexibility to "skip" a payment if needed without incurring late fees or a credit hit.

I have never seen this on mortgages, have you? I've seen it on student loans.

[ncole1]

Originally Posted by KaraG

I have never seen this on mortgages, have you? I've seen it on student loans.

My father's first two mortgages were like that.

[jms493]

Originally Posted by KaraG

I have never seen this on mortgages, have you? I've seen it on student loans.

Yeah when I was paying off my student loans they were screwing up and paying future payments. it wasnt that much so I didnt bother trying to get them to fix it.

On my mortgage I don't see that option.

[Jeo123]

Originally Posted by jms493

Yeah when I was paying off my student loans they were screwing up and paying future payments. it wasnt that much so I didnt bother trying to get them to fix it.

On my mortgage I don't see that option.

It depends on the company. My mortgage with US bank has that option.

[Lacerta]

My current mortgage is like that too. If I make extra payments, it pushes out my next due date. But then, it is also a non-amortized loan. Every month, the amount that goes to principal and the amount that goes to interest remain constant.

[Petunia 100]

Originally Posted by Jeo123

It depends on the company. My mortgage with US bank has that option.

My mortgage is with Wells Fargo. I have the option to apply towards future payments too.