QUESTION
Will my son not be able to save anything on his interest even though he decides to pay his loan in advance?
Asked on Sep 05th, 2013 on Estate Planning - Michigan
More details to this question:
My son has a closing on his first home tomorrow, September 6, 2013. I requested a copy of all legal documents for our review. While going through them this evening, I was unpleasantly surprised to find the following sentence in the Promissory Note regarding the prepayments: The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note. However, the Note Holder may apply my Prepayment to the accrued and unpaid interest on the Prepayment amount, before applying my Prepayment to reduce the Principal amount of the Note. The loan is made that there is no prepayment penalty. However with the sentence in bold above, I believe the bank reserve its right to charge interest to any prepayment amount that my son makes in the future. My son is determined to pay his 15 year loan for about 5-6 years in order to save from interest on the principal. If I understand properly that under the condition the bank institutes, my son will not be able to save anything on his interest even though he decides to pay his loan in advance.
8 ANSWERS
Bankruptcy Attorney serving Florissant, MO
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Law Offices of Thomas Corcoran Phipps
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I would tell the mortgage company that he wants that section deleted.
Answered on Oct 07th, 2013 at 3:46 AM
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Paying in advance still saves interest even if applied to the principal. This clause is in every loan and it is just the way it is. At James Law Group we make every effort to respond to you quickly and efficiently. This means we may be responding to you from a mobile device. As you know, responding on these devices can result in typographical errors that my otherwise not occur. In order to provide this extra service, please be aware of this and excuse any errors that may be caused by responding in this forum. The content of this message is protected by attorney-client privilege.
Answered on Sep 09th, 2013 at 9:36 AM
It is still a good thing to prepay the principal. Federal and state laws dictate how payments are applied. Any outstanding interest would be paid first, then principal. I doubt that the lender means that it will apply the money to future interest, because it is not yet due.
Answered on Sep 09th, 2013 at 9:23 AM
Commercial Contracts Attorney serving Boise, ID
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Peters Law, PLLC
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No, your interpretation is not correct. If he makes a payment mid-month, there will be a little interest accrued that must be paid before principal is paid.
Answered on Sep 09th, 2013 at 7:17 AM
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"Accrued interest, but not paid" is the important wording not "unaccrued interest, but not paid" thus there is no prepayment penalty.
Answered on Sep 06th, 2013 at 10:23 AM
Most mortgages permit the borrower to allocate how extra payments will be applied on the payment coupon or via their website. Check those options out.
Answered on Sep 06th, 2013 at 10:21 AM
Business Planning Attorney serving Livonia, MI
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Frederick & Frederick Attorneys at Law
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I believe your understanding of this is not correct. The interest in your question would not have been unpaid or accrued, if your son pays the principal balance early. He can still pay the loan off ahead of time. If that were not the case, then every lender would use such a clause to prevent any borrower from ever paying off their loan early. Your son should clearly write "principal reduction" on his added payment, in order to make sure it is properly applied.
Answered on Sep 06th, 2013 at 10:15 AM
The language "accrued and unpaid interest" means interest that is already due under the loan. So, if your son has made all monthly payments on time and then pays something in addition to the monthly payment, there would be no "accrued and unpaid interest" so the entire additional payment would be applied towards reduction of principal.
Answered on Sep 06th, 2013 at 7:35 AM