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I have a 4.51% ARM (with a credit union) on some land I own. The monthly mortgage payment is $83.27. I increased my monthly payments to $250.00 but recently discovered the extra money ($166.73) was not being applied 100% to the principal as I thought it should be.

When I pay more on this loan, shouldn't all of the additional payment go to the principal and none on interest?

  • Can you show the initial mortgage statement and the current? How much of 166.73 is getting applied to principal? Maybe you are misunderstanding how the additional payment is applied. Even on reduced principal there is some interest, did you keep the tenor of repayment same or reduce it. – Dheer Oct 23 '17 at 10:47
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It depends on the loan contract if this is even possible, and also if it is the default.

Banks of course prefer to use those extra payments against ‘future payments’, meaning you are giving them interest-free money upfront, to apply against your next requirement payment. That is of course very bad for you, as you do not only save no interst, but also lose the cash-flow.

Most (but not all) contracts do allow prepayments, but many require you to explicitly specify that you want the extra applied against the principal.

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You may need to specifically state that your extra payments should go towards principal, and should not be considered early payments of future months.

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