Other Payment Issues

Aside from the pros and cons of the payment schedule for amortized mortgages discussed in the preceding section, the payment schedule of an amortized mortgage can be burdensome for those who are trying to actively organize their personal finances. The schedule for various mortgage plans does not always match up with the way a borrower would prefer to pay off their loan, due either to circumstances or individual preference.

Some borrowers who have a fixed rate mortgage would like to make extra prepayments to reduce the principal in order to lower their monthly payments. With a fixed rate mortgage, this plan is not possible.

Extra monthly payments will apply to reduce the loan’s balance, but will not affect the loan’s monthly payments. Instead, the amount of time it takes the loan to pay off will be appropriately reduced.

Other borrowers have exactly the opposite problem. These borrowers have an adjustable rate mortgage (ARM), and would like to reduce the amount of time it will take to pay off their loan. This is almost impossible with an ARM.

When the interest rate is adjusted, the monthly payment will also be adjusted to a level that will allow the loan to pay off at the end of the loan’s stated term. Early payments will reduce the monthly payments, but will not affect the term.

Some borrowers who receive yearly bonuses would like to make an extra payment in the month their bonus is received, while skipping a payment in another month when income is reduced. The payment schedule for amortized mortgages does not allow this. This borrower would have to save his bonus money and make all the payments at the scheduled times.

Finally, a borrower might want to make two payments each month, each for half of the scheduled monthly payment. Unless a borrower has a biweekly mortgage, this plan won’t work either. This borrower will have to deposit one of his biweekly checks and make only one mortgage payment each month.