Prepayment Definition – Mortgage Fundamentals 

What Is Prepayment?

Prepayment is an accounting time period for the settlement of a debt or installment mortgage earlier than its official due date. Prepayments are the fee of a invoice, working expense, or non-operating expense that settle an account earlier than it turns into due. Prepayment is an motion taken by a single particular person, a company, or one other kind of group.

Understanding Prepayment

Many forms of money owed and obligations are settled upfront by prepayment. Firms would possibly prepay lease, wages, revolving traces of credit score, or different short-term or long-term debt obligations. Customers can prepay bank card fees earlier than they really obtain a press release, or they could repay loans early by refinancing.

Some loans, similar to mortgages, impose a penalty for prepayment. Debtors should be made conscious of and conform to this provision on the time they take out the mortgage. The penalty usually solely applies to paying off the complete stability, similar to by refinancing. A borrower can often make intermittent additional principal funds with out penalty.

A prepayment may be made for the complete stability of a legal responsibility or it may very well be a partial fee of a bigger mortgage that’s made upfront of the due date.

Varieties of Prepayment

Prepayments are frequent in a wide range of contexts. People and enormous companies make prepayments.

Company Prepayments

Prepayments are mostly pay as you go bills within the company surroundings. These expenditures are paid in full in a single accounting interval for an underlying asset to be consumed in a future interval. The prepayment is reclassified as a standard expense when the asset is definitely used or consumed. A pay as you go expense is first categorized as a present asset on the corporate's stability sheet.

For instance, an organization can checklist $6,000 as a present asset underneath the pay as you go lease account on its stability sheet if it rents workplace house for $1,000 a month and prepays six months' lease. The corporate would cut back the present asset by $1,000 in every subsequent month and would checklist the expense on its revenue assertion as an working price of $1,000 as the whole pay as you go lease bills are literally incurred.

Prepayments by People

Personal people additionally make prepayments, and the non-public accounting course of is far simpler. A client would possibly run up a month-to-month bank card invoice with a settlement date of 30 days after the tip of the month.

If a client incurs $1,000 of whole bills on the cardboard and pays it off on the thirtieth day of that month, it's thought-about a prepayment as a result of the invoice isn't really due for an additional 30 days. The patron's bank card firm tracks these prepayments, so there may be no need for the buyer to account for it personally.

Prepayment by Taxpayers

Taxpayers frequently—and maybe involuntarily—make a prepayment of taxes as a result of some f their paycheck is withheld. Technically, taxes are due on or about April 15 annually, however employers are required to withhold taxes every pay interval and ship the cash to the federal government on the worker's behalf.

Self-employed people are anticipated to make a prepayment of taxes by making quarterly estimated tax funds. In both case, the taxpayer will obtain any extra again as a tax refund in the event that they pay greater than their eventual tax legal responsibility.