The trick to getting ahead on loan payments, especially for student loans and mortgages, is making principal-only payments. Such payments are also called “prepayments.” Principal-only payments cause a loan to amortize sooner. If you have an adjustable rate or interest-only mortgage, principal-only payments can lower your interest rate. There are many ways to make principle-only payments.
The first step is to review the loan contract. You can also call the lender and start asking questions. If the lender arranges to have your loan serviced by an agent, the terms regarding principal-only payments can change. If you get a notice that your loan servicer has changed, call the new servicer to determine how to continue making principal-only payments.
The first question to ask is: am I allowed to make principal-only payments? Most lenders allow you to do so only if you are current on regular payments. Some lenders charge a fee for making a principal-only payment.
Next, ask how to make a principal-only payment. Some lenders require you to send principal-only payments to a different address than regular payments. If you send a principal-only payment to the same address as a regular payment, the amount may only be applied to future regular payments. Some mortgage lenders provide debtors with a mortgage coupon to state the extra amount above the regular payment.
If you phone in payments, direct the representative with whom you speak to make a principal-only payment. Write down their name, identification number, and time you spoke to them. If you mail in a check, write “principal-only payment” in the memo space. To avoid confusion, think of sending two checks: one for your regular payment and one clearly marked as a principal-only payment.
Many lenders allow you to set up online bill pay with a bank or credit card. A number of these lenders apply overage from your regular payment to principal. Other lenders avoid confusion by offering a bi-monthly payment plan. This is a structured plan in which you pay every two weeks instead of every month. A bi-monthly payment plan allows you to add one extra regular payment per year.
Lenders may get confused if you send a principal-only payment equal to or greater than a regular payment. They think you are trying to make a regular payment a month in advance. Debtors may be able to avoid this problem by sending a principal-only payment lower than their regular payment.
If you can steadily make principal-only payments in addition to your regular payments, ask your lender whether they are willing to amend your loan contract. You may be able to negotiate for better terms on the loan. Check your state’s laws to determine if you need to put the changes in writing.
Debtors should recognize that principal-only payments do not satisfy requirements to make monthly minimum payments or pay off penalties and interest. If a debtor has any outstanding charges, a lender may apply a principal-only payment toward these charges despite instructions to the contrary from the debtor.