Keep Track of Extra Payments

Question: I have read your columns about the benefits of paying early, but how do I know that my extra payments are being properly credited?

Answer: I have never heard of a case where a servicing agent misappropriated a prepayment. That would be outright larceny committed against the borrower, which is rare in this industry.

That said, mistakes do happen, and it is a good idea to keep an eye out for them. A few lenders have begun to give borrowers access to their payment history on the Internet, but it will be a while before this becomes standard practice.

Meanwhile, you can use an Excel spreadsheet I developed for just this purpose. It shows your entire amortization schedule, with an empty column for prepayments. When you enter a prepayment in the month you pay it, the entire schedule is recalculated.

For example, you take out a loan for $200,000 at 6.5% for 15 years. You enter these numbers at the top of the spreadsheet, and it gives you the complete schedule, including the balance at the end of every month. It shows, for example, that after 12 months you will have a balance of $191,854. If you make an extra payment of $1,500 in month five, the schedule recalculates to show a balance in month 12 of $190,296. If the lender has properly credited you with the prepayment, the balance shown for month 12 on the lender’s statement should be identical.

If you enter every prepayment in the spreadsheet and save it, monitoring your lender’s bookkeeping will be a breeze.

Monitoring amortization on an adjustable rate mortgage, or ARM, is a little trickier. You must create a new loan on the spreadsheet every time the rate changes. The new loan amount is the balance just before the rate change, and the new term is the original term less the number of months that have expired.

For example, if the loan described above is an ARM on which the rate changes at the end of one year, and assuming prepayment of $1,500 in month five, the new loan is for $190,296 and 168 months. Using the new rate determined by the lender, the spreadsheet will calculate the new payment and the new amortization schedule.

When Extra Payments Are at Irregular Intervals

Q: I have tried to use the extra payments calculator on your Web site to see when my loan will pay off, but it is for people with regular habits who pay a certain amount at regular intervals. My extra payments are scattered and for varying amounts. Can you help?

A: Yes, the Excel spreadsheet I just described will take account of any number of extra payments of any amount in any month, and show you when payoff occurs. You just scroll down the worksheet until you get to a zero balance. Extending the example I gave above, the first extra payment of $1,500 in month five results in payoff in 177 months. If I add extra payments of, say, $2,200 in month 11, $1,200 in month 25 and $4,500 in month 39, I find payoff in 167 months.

You can download the Excel spreadsheet from www.mtgprofessor.com/xtrapmts.xls. Be sure you save it to your hard drive so you can maintain a continuing record under your own control.

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Jack Guttentag is a syndicated columnist and professor of finance emeritus at the Wharton School of the University of Pennsylvania. Questions or comments can be left at www.mtgprofessor.com.

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Distributed by Inman News Features.