Are you paying extra on your mortgage correctly?

Educate yourself on how to make extra mortgage payments.

Many homeowners send in extra money with their regular mortgage payment in the hopes of paying down the mortgage balance faster. Unless the finance institution has indicated on payment coupons or in writing that the extra monies will go towards reduction of the principal, the extra money can end up going to pay off other installment items instead.

“Homeowners must read the fine print on documentation,” says Michigan State University Extension educator LaShawn Brown. In the mortgage documents, the lender outlines how extra monies received will be applied to the account. The lender may also have a special process that the borrower must follow for the extra payment to be applied to the principal balance. When homeowners want to pay extra funds towards the reduction of their principal balance, this is known as an exception payment. The lender may require that the exception payment be mailed separately with a letter signed by the borrower indicating that they desire the extra funds be applied to the principal balance. If the process is not followed, according to many mortgage documents, the extra funds may be paid to the account in the following order:

  1. To the Mortgage Insurance Premium (PMI)
  2. To any taxes, or special assessments
  3. To any Interest due
  4. To pay down the principal (aka the amortization of the principal)
  5. To any and all late charges on the account.

As seen above, the order of Payments received is clearly outlined. Any extra monies whose destination is not properly indicated may be applied elsewhere instead of the intended principal balance. It is important that homeowners read the fine print in their mortgage document under a section titled ‘Application of Payments and Proceeds’ or ‘Application of Payments’. This section clearly details how Lenders will apply funds received by them for the intended account.

It is a best practice that homeowners follow up with the Lender to ensure that any extra monies or payments are properly applied to the principal balance. Some exceptions exist in which those extra funds may not be applied directly to the amortization of the mortgage. For example, if there are significant late fees or other unpaid installment items, the Lender may apply the funds to those items. It is very important to contact the Lender to determine the process for having extra monies applied to the reduction of the principal balance.

Homeowners who have trouble defining the terms in their mortgage document can visit the Glossary from the Department of Housing and Urban Development for further clarification.

Paying down mortgage debt is a great idea but you must understand the rules. For more information on mortgage matters visit us at MI Money Health or Michigan State University Extension.

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