The loan repayment account is the designated account opened by the lender for the borrower to make the monthly obligated payments.
Borrowers are supposed to make deposits into this account via check, cash deposit, or wire transfers, etc, in order to meet their debt obligations.
With arrangement, this recurring payment can be automated with a request to the bank holding the borrower’s savings or current account.
In certain circumstances, the loan repayment account can also be interest bearing.
Meaning the any funds sitting in the account that exceeds zero balance or a specified figure, borrowers can earn interest on it.
For example, for a HELOC, lenders can encourage borrowers to keep funds in the account by offering interest on balances.
For regular mortgages, extra funds in this account will usually be credited towards prepayment.
However, this is not a given.
Sometimes lenders assume that the extra funds are to be kept for the next payment instead of using it to reduce the principal.
If there is any doubt as to how lenders will perceive the presence of extra funds in the account, a borrower should contact account servicing to clarify.
Changes on how these extra payments are handled can then be done if there are no terms restricting repayments are to be managed.
It is important to note that for equity loans, two accounts will be created for the homeowner.
- One which contains the funds
- One for repayment
This is to prevent confusion on the part of the borrower.