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Posted On: 09/13/2017

Question: Our mortgage payment is $1,412 a month. We would like to make a larger payment so we can pay down the loan more quickly but do we need some sort of formal repayment agreement such as a bi-weekly contract? Is it possible to simply send the lender a check for $1,500 monthly, an amount we can afford?

Answer: An extra $88 a month can make a big difference. Imagine that you borrow $150,000 at 4 percent interest. The monthly payment over 30 years will be $716.12 for principal and interest. If you made an extra $88 payment every month – a total of $804.12 toward the loan – the mortgage would be paid off in a little more than 24 years. Since few loans are held to term, the likely impact is that when you sell the property, you will simply owe less to the lender and as a result will get a bigger check at closing.

In the past lenders discouraged prepayments with huge penalties. Today, however, they generally favor prepayments because the smaller the debt, the less risk to the lender.

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Under federal rules lenders are allowed to charge prepayment penalties for “qualified mortgages” (QMs). However, while lenders can charge prepayment penalties in theory, in practice it does not happen very often. The reason is that virtually all QMs are FHA, VA and conforming loans where prepayment penalties are not allowed. The result is the only place where you can find residential mortgages with prepayment penalties today is with “portfolio” loans that meet QM standards. Portfolio loans are mortgages originated and kept by lenders, loans that are not sold to Fannie Mae, Freddie Mac, or other buyers.

With prepayment penalties off the table for virtually all borrowers the odds are overwhelming that you can make additional monthly payments without a problem. But, a little prudence is in order.

Lenders collect tens of millions of mortgage checks every month and it’s possible for mistakes to happen. Make sure you add the extra money to the right line, to the “extra principal” space and not the space for additional escrow payments, late charges or the ever-mysterious “other” charges.

Second, check your mortgage statement to assure that your extra payment has been properly recorded, that it somehow did not wind up on the wrong line.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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