Beware of this risk when making extra principal payments on your mortgage

Many people choose to make extra principal payments on their mortgage to reduce their debt, and eliminate the need to have a mortgage expense earlier than their mortgage term. If you use this strategy, please be aware that on occasion, banks have been known to not credit your extra principal payments directly towards reducing your principal loan balance. Homeowners don’t always catch this mistake.

What should happen

When making extra principal payments, the exact amount of extra principal payment you make should be deducted from your remaining loan balance.

Let’s say that instead of paying your regular mortgage payment of $2,400, you send in a check or do an electronic transfer for $4,400. You probably meant that extra $2,000 to go towards reducing your overall debt (so if your remaining loan balance is $100,000, it would become $98,000, for example), right? Do this enough times and your debt shrinks considerably.

If you are making extra principal payments, your debt gets smaller and the amount of money going to principal vs interest increases, allowing you to save money on interest.

If you made an extra principal payment of $1,000, your remaining loan balance (or principal balance) should decrease by the same amount, plus the principal you paid with your normal monthly mortgage payment. If not, call your bank right away.

If you don’t keep track, you will never know there is a mistake, and it can cost you thousands of dollars.

Types of customer complaints related to incorrect handling of extra principal payments

There are thousands of complaints submitted every year to the Consumer Financial Protection Bureau (CFPB) around mortgage payment processing. Here are some snippets of actual consumer complaints around proper applying of mortgage principal payments from the CFPB complaint database:

“SLS refuses to properly apply my principal reduction payments”

“Union Home Mortgage Corp Office In OHIO The branch of the institution that I send my payments to DOES NOT KNOW HOW TO ADD ADDITIONAL PRINCIPAL to my payments”

“I was adding additional principal to my monthly payment, however PFCU would simply withhold the additional principal and never applied it to my loan. Instead they began to move my payment due dates back”

“I believe, based on several personal experiences, that the bank ‘s processing center is intentionally holding over-payments ( payments with additional principal)”

“Every month I make payment beyond the minimum payment due for my mortgage. Every month Franklin American Mortgage Company credits extra payment as pre-payment for the next month rather than as extra principal on my account. I have called customer service and I have written customer service and I have been assured that the logic model for making payments to them has been changed, but each month I am treated the same. This approach benefits them as they charge more interest”

“I went into a Wells Fargo branch to make a {$500.00} cash payment… I have called wells Fargo three times requesting a revised account summary with the principal payment showing on my account summary for my personal proof ; for some unknown reason a new account summary have not been created”

“The statement detail incorrectly showed the balance of the loan… and did not reflect principal repayment received by Freedom Mortgage”

How to avoid risk when making extra principal payments on your mortgage

If you are making extra principal payments on your mortgage, here’s a simple way to avoid the risk of your bank not applying your payments properly: check your remaining loan balance (sometimes stated as remaining principal balance) before you make an extra principal payment. If you don’t know how to get this information, we have a short video on where to find it. Then, on your next statement, make sure that your remaining loan balance has decreased by the same amount as your extra payment plus the principal you paid in your monthly mortgage payment. For example, if your remaining loan balance is $100,000, and you pay $2,000 as an extra principal payment, make sure your loan balance decreases by $2,000 plus the principal you paid in your monthly mortgage payment. For example, if you current monthly mortgage payment is $2,400, and $1,800 of it is your interest payment and $600 is your principal payment, make sure that your remaining loan balance at your very next statement is $97,400.

Don’t delay! Errors in the way that payments are applied are then amortized and can cost you even more money over time as you may end of paying interest on the amount that you intended to go to paying down your loan balance. It’s essential that you pay attention to your remaining loan balance to avoid this risk.

Report errors in applying your principal payment to the Consumer Financial Protection Bureau (CFPB)

The CFPB has an easy way to file complaints, and they really do follow up on them. And, it’s easy to do. Just go to the CFPB Complaint Database and click on Submit a Complaint. Describe your issue and the CFPB will mask any personal information so it does not appear publicly. The CFPB will then contact the bank you are having issues with an prompt a remedy from them.

It is also good to save any records of payments, statements and communications, as well as notes from speaking with the bank you have the complaint about for a faster resolution.