It is true that paying extra on the principal of your mortgage can save you significant money over the term of the loan.  In addition, prepayment penalties are thankfully not common.  I surmise that this is due to market pressure.   I have seen that borrowers are generally pretty savvy to watch for prepayment penalties.  I have not kept specific tabs on it, but it’s definitely up there in my “most asked questions” for mortgage transactions and, most of the time, I get to happily point to the paragraph in the Uniform Note that says there is no prepayment penalty.

However,  what a lot of people are surprised about when I tell them, is that if you send in some extra money to go on the principal of the loan, you have to specifically tell the lender that is where you want those funds to be applied.  It is possible that this is not true of all lenders, but the default I have seen (even for my own personal car loan) is for those extra funds you send in to be applied to a future payment, instead of the principal.    If you look at your mortgage statement/bill and there may be a box to check indicating that you want the extra funds to apply to the principal.  Otherwise, you may have to write a note to the lender or servicer to tell them to apply it to the principal.

Also, I have been seeing lenders adding in terms to their loan that if you are not current on your loan, you cannot put an extra payment on the principal.  They may require you to get current and stay current for a certain period of time before you can pay down the principal.

Some things to keep in mind.

Written by: Morgan Jones, Esquire