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Yes, the mortgage company is required to abide by the “written wishes” of the borrower. Those written wishes are contained in the note and security instrument that is signed when a borrower takes out a loan. In other words, the mortgage company is legally obligated to abide by the loan agreement, but are not required to follow instructions from the borrower that do not agree with the loan agreement. So if the mortgage allows for prepayment “in whole or in part without penalty” then extra principal paid by the borrower should be deducted from the loan balance and future interest charges should be computed based on the new lower principal balance. Some notes require that the borrower notify the lender of the prepayment in writing. In most instances the mortgage company does not have the right to ignore prepayments along with the written notice, but there are exceptions. Prepayments may be applied to accrued and unpaid interest before being applied to principal. There could also be provisions allowing the lender to apply payments to outstanding late charges or shortages in an escrow account before applying them to principal. To know what your rights are look to the note and security instrument contained in the loan documents that you signed.
If you feel that the lender is not following the terms of the loan agreement you may make a “Qualified Written Request” to the lender under the Real Estate Settlement and Procedures Act (RESPA). RESPA is the federal law that regulates the servicing of most residential mortgage loans. Here is a link that tells how to make such a request:
Every lender has different terms with regards to the application of principal prepayments, and they are spelled out very specifically in your NOTE, signed at closing.
In most (but not all!) cases, the lender will apply money that is received first to any interest due, then to any outstanding late charges or escrow deficits, and then to principal. A lender will NOT generally accept a lump sum and assume that the borrower is pre-paying interest that has not yet been charged (such as when a borrower is going away and tries to send three or six payments at once in advance) – instead, without prior written instruction otherwise, they will apply the excess funds to fees and principal and bill for interest the very next month. (There is a legal reason for this – technically, the prepaying borrower has not actually borrowed the money for the months that follow yet, only the current one – and therefore the lender can’t really charge the borrower interest for future months without violating the terms of their own agreement – interest is paid in arrears).
If you plan to make a large principal reduction, or prepayment, it is best to get the lenders written instructions and approval PRIOR to sending the payment. Otherwise, the lender should apply the payment exactly as dictated by the terms of the note – and a customer would have right to complain if they did not.
What are the guidelines for sending in extra principal? Is the mortgage company required to abide by my written wishes? Does the mortgage company have the right to ignore my written wishes as to where the extra payment is to be applied?