Most fixed rate loans are not assumable. They will contain a due on sale clause. This clause says that if you sell your property, you must pay off your loan. They may also contain a prepayment penalty. This protects the lender against falling interest rates, since you are most likely to pay off the loan by refinancing if rates drop dramatically.

An important question to ask about any loan is what happens if you make additional principal payments. An additional principal payment means that you pay more than the required amount of your monthly payment. This extra money reduces what you owe. It does not go to lessen the following month’s payment. Since your interest amount is based on what you owe (your declining balance), you will pay less interest on future payments. Prepayment penalties can cover additional payments as well as paying off the loan in full. For example, this prevents you from quickly paying down your $200,000 loan to $50,000 and then making only the required payments.

Another question you should ask is how much extra you can pay each month. Before the use of computers, lenders required that you pay additional principal payments in specified increments, such as a double payment or $100 increments. Since the computer can figure out whether you paid $100 extra or $3.57 extra without difficulty, there is no longer a reason for mandated increments. If your lender requires specific increments, it will make additional payments more difficult for you.

Additional principal payments are especially important when rates are high. For example, on a $100,000, thirty-year loan with a rate of 8.5%, an additional principal payment of $25 per month would reduce the term from thirty years to twenty-six years, three months. An additional monthly payment of $75 would reduce it to just over twenty-one years, six months.

Even when rates are low, it helps. A $25 additional payment on a 5.5%, $100,000 loan would reduce the term to twenty-seven years.

Be sure you know how much you can prepay without penalty, as well as the penalty you would owe for a complete payoff.