My son has a closing on his first home tomorrow, September 6, 2013. I requested a copy of all legal documents for our review. While going through them this evening, I was unpleasantly surprised to find the following sentence in the Promissory Note regarding the prepayments:
"...The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note. However, the Note Holder may apply my Prepayment to the accrued and unpaid interest on the Prepayment amount, before applying my Prepayment to reduce the Principal amount of the Note."
The loan is made that there is no prepayment penalty. However with the sentence in bold above, I believe the bank reserve its right to charge interest to any prepayment amount that my son makes in the future. My son is determined to pay his 15year loan for about 5-6 years in order to save from interest on the principal.
My question to you you is, if I understand properly that under the condition the bank institutes, my son will not be able to save anything on his interest even though he decides to pay his loan in advance.
Thank you very much.