mortgage

How to pay off a mortgage more quickly

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Highlights
  • There is more than one way to put extra money toward mortgage principal.
  • Explain that the extra money is for principal and not for future payments.
  • Talk to the lender first if you want to prepay a six-figure lump sum.

A lot of homeowners want to pay off their mortgages before the end of the loan term. This is especially true for borrowers who want to repay their home loans before retirement. There are a number of ways to accomplish a mortgage payoff.

The two easiest ways to put more money toward a mortgage are to set up automatic payments from a bank account or use the lender's website, explains Jerald Banwart, senior vice president of customer operations at Wells Fargo Home Mortgage in Des Moines, Iowa.

"For those who have a plan to pay off their loan, we will go out and withdraw the money from your account to make your payments … or you can go online anytime on our website," he says.

Automatic payments can be made monthly, bimonthly or biweekly to match the borrower's employment pay periods, if that's the borrower's choice.

Extra money can be paid in other ways as well. Banwart says borrowers can add an additional sum to a scheduled payment, mail in an extra check between payments, call the bank's customer service telephone number, or even walk into a branch and arrange the transaction in person with a teller.

Loan must be current

Technically, what most homeowners think of as an extra payment isn't really a payment because it's not one of the scheduled installments. Rather, it's extra money applied to principal, called "curtailment" in bank parlance.

"They're not really making another payment," Banwart explains. "They're sending in funds to pay down the principal."

Borrowers generally can apply extra funds to principal as long as their loan is current, meaning all the scheduled payments are up to date, adds Vicki Parry, assistant vice president of mortgage and equity servicing at Navy Federal Credit Union in Vienna, Va.

If a prior payment is late or has been missed or the loan is delinquent, the extra funds must be applied to make up that difference before additional principal can be paid.

The same isn't true for an escrow or impound account used for property taxes and homeowners insurance, however. Banwart says a shortfall there can be paid in a lump sum or spread over a number of future payments, but it needn't be made up in full before additional sums can be applied to principal.

Clear instructions

Borrowers who want to send in extra money don't need to call the lender or loan servicer ahead of time.

"There's really no reason to call and say, 'Hey, I'm going to do this,'" Banwart says.

That said, communication is crucial to ensure the additional funds are applied to principal and not to the next scheduled payment. Clear instructions are especially important if the borrower's intention might not be clear, he adds.

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"As long as you have a way of telling us either via a coupon or online or through the branch, you can be assured it will be done correctly," he says. "It's when you just send in a check and don't say what to do that issues can arise. We're doing our best to guess what you wanted."

Two situations likely to cause confusion: The borrower wants to pay an extra amount exactly equal to the scheduled payment, or the borrower wants to pay an extra amount right before the next scheduled payment is due.

Curtailment limits

Borrowers who want to apply a relative large extra sum to their principal -- perhaps because they've received an inheritance, bonus or other windfall -- can do so, but a few cautions are in order. Some lenders limit the amount that can be paid online to protect against fraud or a typographical error. Wells Fargo, for instance, caps online principal curtailment to $99,999 per transaction, in part to guard against customers accidentally trying to pay $100,000 instead of $10,000.

Another caveat is that the additional money can't equal or exceed the loan balance, according to Hugh Suhr, a spokesman for SunTrust Mortgage in Atlanta. A loan payoff figure is a moving target due to interest calculations, and thus it's best discussed with the bank in advance.

No money back

Here's one more tip: Borrowers who send in extra money by mistake might be able to reverse that error if they contact the lender with haste. But extra money sent in long ago generally can't be reapplied to current or future payments if, say, financial difficulties arise.

"If it's within 30 days, it's typically not an issue," Banwart says. "But if someone is coming back and asking for the last five years of curtailment, the answer is going to be 'no.'"

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