Finance Charge

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  • #65809
    mariajohn11
    Member

    Hi All,

    I need your help. My statement says that if I pay the loan off early, I will not be entitled to a refund of part of the finance charge. What does this mean?

    #65810
    Nelsont
    Member

    You are charged a fee every month for the loan. This is how the bank makes makes money. Your statement means the bank is going to charge you the fee regardless. Sometimes they don’t. In this case they will.

    #65811
    Al92
    Member

    @Nelsont Does this mean that you can’t pay off your mortgage early by making extra payments?

    #65812
    Nelsont
    Member

    No on the contrary. If I’m not mistaken I believe @mariajohn11 is not referring to the mortgage.

    If you wanted to make double payments you will not pay off your mortgage in half the time due to interest accruing and being added each month. A 30 year mortgage paid 2x (or double payments) per month will take about 18 or 20 years to pay off. Making bi weekly payments (13 monthly payments per year) will take 23-25 years to pay off.

    If you wanted to get a pay off amount in lump sum the bank will have to do a calculation to figure out how to remove the interest. The interested is charged per day and added to the bill at the end of the month. You might have 3 months left on your car loan for instance so you will get charged 3 months interest if you pay it once per month. If you pay it all at once you will get charged only 1 month interest. In some cases you will not get charged this month’s interest because the month has not elapsed yet. In other cases you will. That’s all it means.

    *Side note: if you wanted to pay your mortgage off in half the time you would need to make triple payments. It sounds counter intuitive but it is due to the fact that every day you have the loan you owe the bank an extra daily fee.

    • This reply was modified 1 month ago by Nelsont.
    #65814
    Al92
    Member

    Thanks @Nelsont.
    Im not planning to pay off my loan early if I can buy down interest rate to 1.5% 🙂

    #65831
    mariajohn11
    Member

    Thanks for your help.

    #65901
    TTrumble
    Member

    Hello all,

    I have to disagree a bit with my friend @nelsont. I recently crunched the numbers on a mortgage for my own son and calculated what would happen when (a) his interest rate was bought down to 2% and (b) he paid one-and-a-half mortgage payments each month. Long story short, the 30-year mortgage would be paid in full in just under 16 years.

    This happens because the amount in excess of the scheduled payment is applied directly to principal, not only dramatically reducing the principal each month (especially in the early years of the loan when the scheduled principal amount of the payment is next to nothing) but since interest does not accrue any longer on the additional principal payment, the balance starts shrinking very rapidly compared to the normal amortization of the loan.

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