Legal Question in Real Estate Law in Illinois

Your son's closing attorney should read that provision in the context of the loan terms, but I do not see that it should significantly impact anything. It sounds like you probably know much of this, but interest typically accrues and is paid with the next monthly payment. So, step by step, unless it is a rare exception where he will be credited six days interest, your son will pay interest for the balance of the month of September at closing tomorrow. His first mortgage payment will be due November 1, which will cover interest for the month of October. The December payment will pay interest for the month of November. So, accrued and unpaid interest would be a number of days on the prepayment amount. So, say on November 15, he pays an extra $1000, which would reduce his principal. The lender would be protecting its right to collect the interest that would already have accrued on that $1000.00. That should be minimal. He will then want to pay attention to how the next payment is applied. It is recommended that he make prepayments by separate check, not an addition to the monthly check, and clear designate it on the face of the check. In my experience, mortgage companies are poor at applying amounts outside the ordinary amortization. He should monitor the account month by month.

I agree with Mr. Repay. All this clause says is that IF there is accrued and unpaid interest at the time that a prepayment is made, the lender can first apply the prepayment to that unpaid interest -- meaning essentially that your son should ALWAYS get a "payoff letter" from the lender so he will know exactly how much is needed to pay off the loan early. This is standard practice -- otherwise your son could make a payment just shy of the amount owed and the loan would NOT be released. It is a way of protecting the lender from underpayment. This alone is NOT a prepayment "penalty" of any kind.