You can pay extra toward the principal on your mortgage, but you can’t pay just the principal and skip the interest. Every regular monthly payment has to cover the interest that has accrued since your last payment before anything reduces the balance. What most loans do allow, usually without any penalty, is an additional payment on top of your required monthly amount that goes entirely to principal. That’s the mechanism behind every “pay off your mortgage faster” strategy.
Why You Can’t Skip the Interest
Your servicer calculates each month’s interest by applying your interest rate to the current loan balance, then collects that interest first out of whatever you send. Only the remainder goes to principal. If you send less than the full scheduled payment, the servicer isn’t obligated to apply the shortfall to principal. It can return the payment, credit it to your account, or hold it in a suspense account until you’ve sent enough to make up a full periodic payment.1Consumer Financial Protection Bureau. My Mortgage Servicer Refuses to Accept My Payment – What Can I Do? The loan is amortized so that the balance reaches zero on the final payment date, and that math only works if interest is paid as it accrues.2Consumer Financial Protection Bureau. How Does Paying Down a Mortgage Work?
What you can do is send an extra payment, separate from your scheduled one, with instructions to apply it entirely to principal. That drops the balance immediately, which in turn reduces the interest charged on every future payment. The earlier in the loan you do it, the more that compounds.
Check for a Prepayment Penalty First
Most residential mortgages written today let you prepay without any fee, but confirm this before you send money. Federal regulations under 12 CFR 1026.43 only allow a prepayment penalty on a residential mortgage if the loan has a fixed rate, qualifies as a “qualified mortgage,” and is not a higher-priced loan. Even where a penalty is permitted, it’s capped at 2% of the prepaid amount in the first two years and 1% in the third year, and it can’t apply at all after three years. A lender offering a loan with a prepayment penalty must also offer you the same loan without one.3eCFR. 12 CFR 1026.43 – Minimum Standards for Transactions Secured by a Dwelling
Government-backed loans don’t allow prepayment penalties at all. FHA rules require the mortgage to allow prepayment “in whole or in part at any time and in any amount” and prohibit any charge for doing so.4Federal Register. Federal Housing Administration FHA Handling Prepayments Eliminating Post-Payment Interest Charges VA and USDA loans follow the same rule. If you’re unsure, pull out the promissory note you signed at closing. Any prepayment penalty has to be spelled out there.
How to Send a Principal-Only Payment
The money part is easy. The instructions are where people trip up. If you just send extra cash with no label, the servicer may treat it as a prepayment of next month’s bill, divert it to escrow, or park it in a suspense account where it does nothing to your balance.
Online
Log in to your servicer’s portal and look for the one-time or extra payment screen. There is almost always a field or dropdown labeled “principal only” or “additional principal.” Make sure the payment is set up as separate from your regular monthly amount, submit it, and save the confirmation. This is the cleanest option and creates its own paper trail.
By Check
Write a separate check from your monthly payment. In the memo line put “apply to principal only” along with your loan account number. Some servicers have a different mailing address for non-standard payments. Check your statement or the servicer’s website. Don’t stuff the extra check into the same envelope as your regular payment without clear labeling.
By Phone
Call the servicer, ask the representative to apply the payment to principal only, and get a confirmation number. Send a follow-up email so you have it in writing.
Whatever method you use, pull up your next statement and verify the principal balance dropped by the exact amount you sent. Misapplication is common enough that federal regulators built a formal dispute process around it.
If the Payment Gets Misapplied
You have a specific remedy under the Real Estate Settlement Procedures Act. Send your servicer a written Notice of Error that includes your name, information identifying your account, and a description of the error. The regulation specifically lists “failure to apply an accepted payment to principal, interest, escrow, or other charges” as a covered error.5eCFR. 12 CFR 1024.35 – Error Resolution Procedures
The servicer has to acknowledge receipt within five business days and then either correct the error or finish investigating within 30 business days. It can extend that by 15 business days if it notifies you in writing before the original deadline runs out. If the servicer confirms the error, it has to tell you what it fixed and when the correction took effect.5eCFR. 12 CFR 1024.35 – Error Resolution Procedures
Bi-Weekly Payments as a Shortcut
If you’d rather automate the extra principal rather than send one-off payments, consider a bi-weekly schedule. Instead of 12 monthly payments a year, you pay half your monthly amount every two weeks. With 52 weeks in a year, that’s 26 half-payments, which comes out to 13 full monthly payments. The 13th goes to principal.
Some servicers offer formal bi-weekly plans and charge an enrollment fee. Others take your bi-weekly payments but still only apply them monthly, which cancels the benefit. Before signing up, confirm the servicer actually credits payments every two weeks. If the plan has a fee or batches payments, you can get the same result on your own by dividing one monthly payment by 12 and adding that amount to each month’s payment as extra principal.
If You Want a Lower Monthly Payment Instead of a Faster Payoff
Extra principal payments shorten the loan but don’t change your required monthly bill. If what you actually want is a lower monthly payment, ask about a mortgage recast. You make a large lump-sum principal payment, and the servicer recalculates your monthly payment based on the new balance across the remaining term. The interest rate and maturity date stay put; the monthly amount drops.
Fannie Mae permits servicers to recast after a substantial principal curtailment, provided certain requirements are met, including that the borrower was fully qualified at origination based on the original loan amount.6Fannie Mae. Loan Delivery Job Aids Recast Loan Overview Lenders typically charge a few hundred dollars and often require a minimum lump sum, commonly around $10,000. One important limit: FHA, VA, and USDA loans are generally not eligible for recasting.
Using Extra Principal to Drop PMI Early
If you put less than 20% down, you’re probably paying private mortgage insurance, and extra principal is a direct way to get rid of it sooner. Under the Homeowners Protection Act, you can request PMI cancellation once your principal balance hits 80% of the home’s original value, meaning the purchase price or initial appraised value, not the current market value. The servicer has to terminate PMI automatically once the balance is scheduled to reach 78% of original value under the amortization schedule.7Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance PMI From My Loan
To cancel early through extra payments, you’ll need to be current, have a good payment history, and in many cases pay for a new appraisal so the servicer can confirm the home hasn’t dropped below its original value.8Fannie Mae. Termination of Conventional Mortgage Insurance These rules apply to single-family principal residences with mortgages closed on or after July 29, 1999.9Office of the Law Revision Counsel. 12 USC Ch 49 – Homeowners Protection On a $300,000 loan, PMI commonly runs $100 to $200 a month, so getting to that 80% mark even a few years early can save thousands.