land contract with balloon payment and extra payments.

[goatmilker]

Michigan - - Hi all - -
I have a land contract with as the buyer of a property. The contract is based on 30 year amortization schedule with 5% APR calculated monthly based on remaining principal. I am approaching the end of the contract when a balloon payment of the remaining principle is due. I have been making payments in excess of the minimum monthly payments every month since the beginning of the contract. The seller and I disagree as to how those extra payments should be handled. I believe they should be applied to the remaining principle each month, and therefore lower the amount of interest due the next month. He just let me know he believes the extra payments are applied to the balloon payment at the end of the contract period. Who is correct?
Thanks!

 

[FlyingRon]

Actually, they probably would be considered early payment of the next scheduled amount. If you wanted them to apply to the PRINCIPAL (you should have made that clear). You've got some calculation to do if that is the case (and the loan does say you should calculate the interest due monthly).

 

[goatmilker]

Are you saying that unless I explicitly stated the extra payments go towards the principal, then they are applied towards future payments by default?
The minimum payments were for $322 - I send a check of $700 each month with a note saying ex March 2017 land contract pymt. Additionally, I sent $25,000 early on in the contract period. I also created an excel spreadsheet that showed a payment schedule with the extra payments being applied to the principal - and the seller acknowledged having seen the spreadsheet. Wouldn't a reasonable person look at those actions and say they imply the payments going towards the principal?

 

[adjusterjack]

Unless there is something in your purchase contract to the contrary, the convention is that addition monthly payments are applied to principal each month and I think a judge would see it that way, too. Amortization calculators figure it that way.

Working backward with such a calculator your starting principal (not counting the $25000) is 59982.68.

Let's say your balloon payment was due after 5 years. At 322 per month your balloon payment would be 55081.31.

However, if you made payments of 700 per month consistently from the beginning your balloon payment would be 29295.49.

You can use the following amortization calculator to play around with your actual figures.

http://www.bretwhissel.net/cgi-bin/amortize

Using your seller's method in my example: 378 x 60 = 22660.

55081.31 - 22660 = 32421.31 a difference of roughly 3000 to the seller's good and you would have paid a lot more in interest than you should have.

 

[FlyingRon]

Sorry, AJ... that is not true in general. Some loans treat the extra payment is often treated as an early payment of the next amount due unless the loan terms or the instructions with the payment say otherwise.

 

[adjusterjack]

Sorry, AJ... that is not true in general. Some loans treat the extra payment is often treated as an early payment of the next amount due unless the loan terms or the instructions with the payment say otherwise.

Isn't that what I said?

 

[FlyingRon]

No, you said it applied to the principal which is different than what I said.

Let's put it this way. Let's say the loan terms work out to 1/2% monthly interest (that's more than the OP stated, but lets use round number).
Current principal balance is $100,000. Your scheduled payment is $1000. That would normally be $500 towards the interest due, and $500 to principal. Let's say you pay $2000 instead. The first $1000 goes the same way. The next $1000 covers what is due the next month (P&I) paid early. Now it does accellerate the principal paydown a bit because you made the ~$500 principal payment early, but it's different than decrasing the principal by $1000 additional.

 

[FarmerJ]

I suggest you use the links above and talk to a attorney just to find out for certain if your states laws addressed that area of contract for deed purchase agreements ( contract for deed = land contract

 

[Stephen1]

Here is another argument in favor of getting the original contract written up by a knowledgeable attorney.