It depends on the loan contract, but apparently, if you don't specify, it is the default action of most financial institutions to automatically apply the payment towards future interest and then principal whenever they receive a payment over the normal monthly amount.
But what about biweekly draft programs with your bank? I'm enrolled in a biweekly draft program on my mortgage, which reduces the overall life of the loan by several years. I contacted the bank to get more specifics of how the extra payment is applied.
I received the following response from a customer service representative:
When enrolled in our biweekly drafting program, [we] automatically draft half of the monthly mortgage payment from your account every fourteen days. As we are unable to apply partial payments, the funds are deposited into a holding account known as "suspense". Upon receipt of the second draft, the full monthly payment is applied and credited to the account.I sent a follow-up email to clarify and received a reply along with an amortization schedule that confirms that the biweekly setup does provide one automatic extra payment straight to principal every year.
Twice each year, there will be three half-drafts within a single month. Once the loan is paid ahead, the additional half-payment is applied to the outstanding loan balance, reducing principal and saving interest charges on every subsequent loan payment.
The biweekly drafting option is the same thing as sending in one additional payment amount per year to be applied as a principal-only payment. We offer the biweekly drafting program to provide our homeowner's the convenience of having the payments deducted. However; if you prefer to manage your payments on your own, you definitely can.
Any other loan tips or strategies? Please leave a comment.