Excess Mortgage Payments labeled "unapplied balance"

[IBroke]

Might be a bit off-topic, but since my mother filed, something odd is going on on her mortgage-account.

I always pay a few bucks (between $25 and $30) as additional principal because this sum will avoid a second $50K balloon-payment at the end of the mortgage.

However, since my mother filed, the mortgage servicer has stopped applying these payments directly to the loan balance. Instead, they put it aside and label it "unapplied balance". Does anybody know what the reason could be? I might give them a call to find out...

[LadyInTheRed]

Hi, IBroke. I moved your post to it's own thread where it is more likely to get responses.

My mortgage payment decreased several months after I filed Chap 13. I decided to keep paying the higner amount to pay down principal. After a couple of months of doing that, I noticed that the excess payments were being add to an "unapplied balance" even though my statements and my promissory note says that excess payments would be applied to outstanding interest (there was none) and then to principal. I called Bank of America and was immeidately transferred to the bankruptcy department. They had to call a different department and "request" that the unapplied balance be applied to the loan principal. They told me that the other department may or may not agree. The did apply it to principal and told me that I would have to call to make the request after every time I made an excess payment. I decided to reduce my payments rather than have to call every month.

[spidge]

My bank started doing this a few months ago and there is a a minimal explanation on the statement. I am in a 13 so any funds that do not add up to a complete payment will be held in an unapplied suspense account. When the total equals a payment amount it will all be applied to the account in the same manor a payment would be. I do wonder if legal. If unapplied are the funds still technically mine?

[IBroke]

Hi, IBroke. I moved your post to it's own thread where it is more likely to get responses.

Thanks, Lady!

[IBroke]

Well, I called them and was transferred to the BK-department as well. I was told that the payments would indeed be applied to the loan but that I couldn't see that on the statement because the loan was in BK. Nonsense, if you ask me..

I am very skeptical about this explanation because by checking the calculation of monthly interest, I can tell for sure that the payments are NOT applied to the principal bearing balance. It doesn't make a huge difference in my case due to our low principal bearing balance. However - instead of paying the identical additional principal each month to stay on course with our payment plan, I have to increase the actual additional payment by 14 cents each month to level out the higher interest charges. And in the second month, I have to pay an additional 28 cents, in the third month, an additional 42 months etc. Over 25 years, that will sum up. Not an issue over the next couple of years - but it certainly bothers me because I see no reason for that at all. The BK is discharged so I don't know why they are not applying these funds.

If I make a payment to my servicer, I want that money to "work" for me on my behalf. The way it is set up now, the additional principal payments are like an interest-free credit to my servicer and I'm not sure why I should tolerate that. After all, I'm not a bank, handing out free credit.

I will call them again in a couple of days. If I still get the same (stupid) response, I'll prepare something in writing, demanding a written explanation for this.

[Jongo]

In some cases, interest loans have a clause which state that payments will be first applied to the interest overdue, then to principal overdue, then interest due, then principal due, (and maybe taxes and insurance due, then prepayment of taxes and insurance), and THEN additional principal, in that order.

In other words, your little bit extra could be doing nothing more than paying the interest due on next month's payment ahead of the due date.

Seeing as how banks are now considering limiting your ability to withdraw money and charge you for making deposits, I see nothing that would keep them from making this type of "play" to skim a few more dollars for their bottom line.

If you wish to make an extra payment toward principal, I suggest a second check - one for your regular payment in full, and the second marked clearly as a "principal-only payment." Yes, a pain in the butt, but most (not all) banks and loans will allow you to do so, but only if you follow their rules.

And, make no mistake about this one important fact - banks do not do anything for you that will "work best for you on your behalf." They work on their own behalf. Helping you out went the way of the dodo bird and the free toaster for opening an account.

Follow the Golden Rule: They who have the gold get to make the rules.

[IBroke]

In some cases, interest loans have a clause which state that payments will be first applied to the interest overdue, then to principal overdue, then interest due, then principal due, (and maybe taxes and insurance due, then prepayment of taxes and insurance), and THEN additional principal, in that order.

In other words, your little bit extra could be doing nothing more than paying the interest due on next month's payment ahead of the due date.

That would be fine with me - but unfortunately, that's not the case.

The problem is that they aren't applying my extra payments to ANYTHING. Prior to my mother's BK-filing, they applied any additional principal-payment directly to the interest-bearing part of the loan. This is how it's supposed to be and conforms to the loan agreement. After my mother filed for BK, they simply took the additional payments and put them into some kind of suspense-account, labeling it "unapplied balance". As of today, there are $283.61 "unapplied". The amount is getting bigger each month and instead of being applied to my loan in to save interest, it just sits there.

[TXskyblue]

My mortgage is held by my credit union and I stay and paid but did not reaffirm.

Since discharge, I've added extra to my payments and they've always credited the excess to the principal (can see online). I made a double payment and they credited all the excess to principal and didn't try to make two month's payments out of it.

I wonder if it's a banks v. credit unions thing.

[LadyInTheRed]

That would be fine with me - but unfortunately, that's not the case.

The problem is that they aren't applying my extra payments to ANYTHING

It was the same for me. They did not apply the extra amount to interest or principal. It seems that the banks think they don't have to comply with the terms of the promissory note if you file for BK.

IBroke, since your mother is in a Chap 7, it will be interesting to see if they start applying the additional payments after she is discharged.

[IBroke]

Soo, I just called them again and the lady I spoke to was much more helpful. She is going to put in a request to have the funds applied to the interest bearing part. She told me it should be done by the 31st. She wasn't quite sure why it wasn't applied in the first place.

I'll keep an eye on it since it's likely that my future additional payments won't be applied, either. In that case, I'll call them semi-annually to request a manual transfer - just like I did today. By doing so, the "interest-damage" will be limited to less than $6/year...

So keep in mind: If you get a response by a rep that sounds illogical and/or fishy, it probably is. Just call again..

[LadyInTheRed]

My mortgage is held by my credit union and I stay and paid but did not reaffirm.

Since discharge, I've added extra to my payments and they've always credited the excess to the principal (can see online). I made a double payment and they credited all the excess to principal and didn't try to make two month's payments out of it.

I wonder if it's a banks v. credit unions thing.

I am sure different institutions, whether banks or credit unions, have different policies. But, I think within the same institution, there may be a pre-discharge v. post-discharge thing. Did you ever make an excess payment between your BK filing and discharge?

[IBroke]

IBroke, since your mother is in a Chap 7, it will be interesting to see if they start applying the additional payments after she is discharged.

That was my first idea once they started this "non-application". I assumed that they wanted to "reserve" the money in case legal issues in her case would arise. However, she received her discharge last June and nothing changed. Maybe they will change it either due to my call or once my mother's BK-case closes - which could be any day now. Yeah, wishful thinking...

But either way, it seems that I can at least manually request the application at any time which is fine with me. This case is another example that you have to take a close look at your finances 24/7.

[LadyInTheRed]

Oh, I was thinking she wasn't discharged. Maybe closing will make a difference.

[TXskyblue]

I am sure different institutions, whether banks or credit unions, have different policies. But, I think within the same institution, there may be a pre-discharge v. post-discharge thing. Did you ever make an excess payment between your BK filing and discharge?

No, I only made my exact mortgage payments. I thought it would be playing with fire to put even an extra 50 cents towards it while BK was active.