Do You Know How Your Mortgage Lender Applies Additional Principal?

Each month I make my regular monthly mortgage payment – the fixed payment amount found on my monthly statement.  I use billpay from my bank.

My lender requires that a full, monthly mortgage payment be made.  In other words, I cannot split my payment into two payments, sending half on the first day of the month and the other half on the fifteenth.  I have to send the full, fixed payment amount, by the due date.

Obviously, I can send them more than the fixed amount, but I can’t send less.  They require at least one monthly payment that is equal to or greater than the fixed amount.

Once the regular monthly payment has posted to my account, I can then focus on reducing my mortgage principal.

According to the FAQs from their website, here’s how my lender applies any additional “apply to principal” amount –

Any additional amount specified as “other” will be applied first to past due principal and interest payments, then escrow deficiencies, then late charges, then fees and costs due, then outstanding principal.

Basically, as long as I don’t have any late fees, late charges, or past due payments, every penny of my extra “apply to principal” amount will be, you guessed it, applied to outstanding principal.  This is a good thing, because this reduces the total amount that I owe on my home, increases my equity, and decreases the amount of interest that I am charged.  Win, win, win.

If you are thinking about paying off your mortgage early, you might want to do some research, and find out how your lender processes extra principal “payments”.