Paying your next payment early is different than paying down the principal.
Structured loans like Mortgages are designed so that the lending institution (or owner of the mortgage) receives a stream of relatively reliable cash. This cash flow (the interest/principal payments) both continue to demonstrate your credit-worthiness (that you can produce that cash), and are used by the institution to service their need for cash.
Imagine this is going on at a small scale. You are retired, and need a stream of cash. You have a pile of money, but only need some of it at any one time. So you go to someone and you help them buy a house.
They use your money and they guarantee you get the house if they default.
In exchange, they pay you X$ per month. This happens to be divided into principal and interest.
You live off that X$ per month. Maybe you are paying rent, or you buy food with it, or maybe you use it to pay for your travel habit.
If they go and give you another Y$ in addition to their X$ per month, you need to know if this money is an early payment of next months money, or intended to pay down the debt earlier (maybe reduce their future payments, or maybe reduce the term of the loan, depending on how the agreement is structured).
Depending on the terms of the loan, there may be difference between early payments and paying down principal. An early payment may go into a conventional bank account earning 0.25% annual interest; paying off the loan might reduce the principal, which is compounding at 3.5% annually. Or maybe early payments also get the 3.5%. It will depend on your agreement.
Paying down principal does not excuse you from paying monthly, while an early payment does excuse you from the next monthly payment.
Failing to make your monthly payments will annoy the person who is using your monthly payments to pay for food and/or airplane travel addictions. So knowing which the borrower is doing is important.
Financial institutions are this same thing, writ large. Here they have many mortgages out, and many income streams, and have plans for what to do with that income stream. Maybe they in turn sell annuities, acting as an intermediary.
In practice, many mortgages have limited bulk payment options, skip a payment options, and explicit rules about the difference between early payment and paying down principal.