To ensure extra payments go toward your loan principal, explicitly select the "principal only" option in your online banking portal, check "principal" on your payment coupon, or explicitly state this to a customer service representative via phone. For automatic payments, set up standing instructions with your servicer to apply extra funds to the principal.
To ensure extra payments go to principal, you must explicitly tell your lender through online portals, phone calls, or written notes (like the memo line on a check), often by selecting a "principal-only" or "extra payment" option and checking the box to "Do not advance due date," as lenders might otherwise apply funds to future interest or next month's payment. Setting up standing instructions or making payments the same day as your normal bill helps too, but always verify the allocation after each payment.
Lenders may not automatically apply extra payments to the principal, so you might need to make a specific request.
If you don't specify, the additional money will go toward your next monthly mortgage payment instead, paying both principal and interest. This will still help you pay off your loan faster and save on interest, but not as much as making a payment toward the principal.
These additional payments go directly towards reducing the loan principal, which is the amount you originally borrowed. By lowering the principal, you also reduce the amount of interest calculated on your loan over time. Understanding how extra repayments work starts with knowing the type of home loan you have.
The key is to specify to your lender that you want your extra payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
But if it's applied monthly, quarterly or even annually, you should aim to overpay just before. If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.
The main downsides of prepaying are tying up cash that could earn more elsewhere (like investments), potential prepayment penalties from lenders, reduced liquidity for emergencies, and missing out on the time value of money, especially if your loan interest rate is low; it also means losing potential tax deductions and can complicate financial aid.
Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.
The 20/3/8 rule is a car-buying guideline suggesting you put 20% down, finance for 3 years or less, and keep your total monthly car expenses to 8% or less of your gross income, helping to ensure you buy reliable transportation without overspending and can still invest in other goals like retirement. It's a tool to avoid being "underwater" on your loan (owing more than the car's worth) and to prioritize financial health over luxury vehicles.
Round your payments up: Round up your regular payment amount to the nearest hundred (or even thousand) dollars, and put the extra amount toward the car loan principal. Tweak your payment schedule: Adjust your payment schedule in some other way to pay more frequently, even if it's only a little.
Generally, no set time within the month is best to make an extra payment to the principal, however, it has been said that extra payments made towards the end of a month are the best option.
When you make a principal-only payment on your simple interest contract, those funds directly reduce your outstanding principal balance. This means you'll pay less interest on the lower principal balance and save money over the life of the contract.
The Bottom Line
Prepayment involves settling a debt or expense before the due date, which can benefit both individuals and companies. Individuals often prepay to reduce interest costs, while corporations may prepay expenses for accounting reasons.
The best way to avoid the penalty is to switch to a different loan type or lender. Not all lenders charge a prepayment penalty. Shop around and compare lenders to find the best mortgage option for you, including lenders that don't charge prepayment penalties, like Rocket Mortgage.
The "3-day rule" for mortgage closing, part of the CFPB's TRID rules, requires lenders to provide the final Closing Disclosure (CD) at least three business days before closing, allowing borrowers time to review final costs, terms, and compare them to the initial Loan Estimate. This window ensures you understand your loan, and if significant changes (like an increased APR or new fees) occur, a new 3-day review period starts, potentially delaying closing.
If you have a fixed-rate mortgage, you'll have an annual overpayment allowance (AOA), which is the amount you can overpay each year without incurring any charges. Your AOA is equivalent to 10% of the outstanding balance of your mortgage.
A household should allocate no more than 28% of their gross income to housing expenses. Total debt payments, including housing, should not exceed 36% of gross income under the 28/36 rule. Lenders often use the 28/36 rule to evaluate creditworthiness and loan approval.