Mortgage company using principal payment to make advanced house payments
My mortgage payment is 1200.00. I send in the 1200.00 each month along with a additional PRINCIPAL payment of 2000.00 clearly noted on the payment book as intended as a principal payment. But each month the mortgage company takes 1200.00 away from my Principal payment and makes the next months regular payment of 1200 in advance and then applies the other 800.00 as a principal payment. I clearly noted that the whole additional 2000.00 is for a principal payment. They have done this repeatedly when ever my principal payment is over 1200.00. This seems like some type of scam; anyone heard of this practice before. Thanks for any help. When I have sent in a principal payment less the the 1200.00 then they don’t do it ; seems because it is not enough to use it as a regular house payment.
I do not know anything about US mortgage; however, usually (with the previous rider) mortgages are payed back as EMIs (Equated Monthly Installments). Individual EMIs consist of a) the interest payment b) principal payment clubbed together and does not change for your month-on-month (unless there is an interest rate adjustment, partial payments, increase of tenure and other sundry).
Each month, however, the proportion of interest paid reduces and proportion of capital paid increases i.e. the interest is paid on reducing balance and the EMIs remains constant.
Given the context above, your case seems to be rather curious (but since the bank is doing it, I am sure you must have signed some repayment plan by which they can do it), you are in effect paying 1200 as interest every month and also giving back part of the capital. It is like paying interest for the capital you are retaining + returning, then where is the need to return the capital, logically speaking, you might as well accumulate the capital payments and return it at the end of the tenure. Looks like in the current scheme you are paying way more than you would if it was a simple EMI.
Suggestion would be to first look at the contract you signed with the bank and especially the repayment schedule as mentioned there. It is as you mentioned, go to the bank and ask if you could transfer to some other repayment scheme, understand the long and short of it and take a call.