A frequently-asked question is whether a mortgage borrower receives any benefit from paying before the due date. In most cases, the answer is ânoâ, but there are a few exceptions. It is beneficial to make early payments on simple interest mortgages, such as HELOCs, and in certain cases, doing so could result in tax savings by shifting the interest from the previous year into this one.
The Short Answer: Generally speaking, there are no penalties associated with paying your mortgage a few days early. In fact, if you can, it’s a good idea to do so as it will enable you to pay off your loan more quickly and save money on interest.
The Long Answer:
A few considerations should be made before paying your mortgage a few days early, even though it can be a wise financial decision to do so. Below is an analysis of the benefits and drawbacks, as well as advice on how to maximize your early payments.
Pros of Paying Your Mortgage Early:
- Save money on interest: The sooner you pay off your mortgage, the less interest you’ll have to pay over the life of the loan. This can be a significant savings, especially if you have a high-interest rate.
- Build equity faster: When you make extra payments towards your principal, you’re building equity in your home faster. This means you’ll have more money to put towards a down payment on your next home, or you can use the equity to borrow money for other purposes.
- Pay off your mortgage faster: Making extra payments can help you pay off your mortgage faster, which can free up money for other things like retirement savings or travel.
Cons of Paying Your Mortgage Early:
- Missing out on other investment opportunities: If you have other investments that are earning a higher return than your mortgage interest rate, you may be better off investing your money elsewhere.
- Prepayment penalties: Some mortgages have prepayment penalties, which means you’ll have to pay a fee if you pay off your loan early. Be sure to check your loan agreement before making any extra payments.
Tips for Paying Your Mortgage Early:
- Make extra payments whenever you can: Even if you can only afford to make a small extra payment each month, it will still add up over time.
- Round up your payments: Rounding up your payments to the nearest hundred or thousand dollars can help you pay off your mortgage faster without even noticing.
- Make a lump sum payment: If you come into a windfall of cash, consider using it to make a lump sum payment on your mortgage. This can save you a significant amount of money on interest.
Here are some additional things to keep in mind:
- Make sure your extra payments are going towards the principal: When you make an extra payment, be sure to specify that you want it to go towards the principal balance of your loan. Otherwise, it will just go towards paying off the interest.
- Keep track of your payments: It’s important to keep track of your mortgage payments so that you can see how much progress you’re making. There are a number of online tools that can help you do this.
- Talk to your lender: If you have any questions about making extra payments on your mortgage, talk to your lender. They can help you understand your loan agreement and make sure you’re making the most of your early payments.
Ultimately, the decision of whether or not to pay your mortgage early is a personal one. There is no right or wrong answer, and the best decision for you will depend on your individual financial situation.
Here are some additional resources that you may find helpful:
- Forbes Advisor: https://www.forbes.com/advisor/mortgages/pay-off-your-mortgage-early/
- Mortgage Professor: https://www.mortgageretirementprofessor.com/A%2520-%2520Mortgage%2520Payments/is_there_any_benefit_in_paying_e.html
- NerdWallet: https://www.nerdwallet.com/article/mortgages/pay-off-mortgage-early
Please note that I am not a financial advisor, and this information should not be considered financial advice. It is always best to consult with a qualified financial advisor before making any major financial decisions.
The Rules When Payments Are Late
When making a payment on a standard monthly mortgage, the borrower will be credited with the amount due on the first of the month, regardless of when it is received. The borrower enjoys a free ride with no interest accruing if the payment is received within the grace period, which is typically the first 10 or 15 days. The borrower will be charged a late fee if the payment is received within the month but after the grace period. The borrower pays a late fee and the credit bureaus report the payment as a 30-day delinquency if it is not received until the next month, but the payment is credited as of the first day of the prior month.
When Payments Are Early
Payments made before the due date are also credited as of that date. This gives the lender free use of the borrowerâs money for that period. For instance, a borrower who regularly makes two-week payments ahead of schedule is effectively giving the lender a two-week grace period, similar to what the lender offers to borrowers who make late payments. There is no benefit to the borrower.
Do This To Pay Off Your Mortgage Faster & Pay Less Interest
Should I pay off my mortgage early?
As time goes on, more of the payment goes toward paying down the principal. This is known as amortization, and it allows the lender to make back a larger portion of their money within the first several years of repayment. The key to paying off your mortgage early is by applying extra payments to the principal. Should I Pay Off My Mortgage?
Should you pay off your mortgage 4.5 years early?
On a $150,000, 30-year loan with a 6% interest rate, a single extra payment every year will help you pay off your mortgage 4.5 years early, saving 56 months’ worth of payments. 3. Refinance To A Shorter Loan
What should I do if I owe a mortgage early?
Remember to check with your mortgage company first, as some lenders impose penalties for making “extra” payments or paying off your mortgage early. Round up your minimum payment. Try rounding your minimum payment up to the next $100. For example, if you owe $1,015 on your mortgage each month, pay $1,100 instead.
When should I pay extra on my mortgage?
You can make additional payments applied to your principal at the time your mortgage payment is normally due, or earlier. “Or you can do so at more frequent intervals during the year,” he says. Any time you pay extra on your mortgage, you need to indicate to your lender that the money should go toward loan principal — not interest.