The monthly payment schedule for a regular mortgage is designed to have the same total amount paid each month, but the percentage of principal and interest varies each month. You first pay the interest calculated from the previous balance. The remainder then goes toward the principal. Then next month the interest portion is calculated from the reduced principal. You pay a little less in interest and a little more in principal. It goes on and on like this until the mortgage is paid off.
Every mortgage I’ve had has a 15-day grace period in addition to having a monthly payment that is due on the first of the month. As long as you pay within the grace period, it’s as if you paid on the first. Whether you pay on the third or the twelfth of each month makes no difference. I chose to have the bank auto debit on the 7th. That gives me a buffer within the grace period. In case something goes wrong, I can still make a payment manually before the 15th.
I made the decision to pay off my mortgage as soon as possible after the new tax law was passed late last year. I no longer receive an additional deduction for the interest on my mortgage due to the $10,000 cap on state and local tax deductions and the $24,000 increase in the standard deduction for married couples filing jointly in 2018. I will switch to the standard deduction.
This means making extra payments that apply to the principal. The sooner I make the additional payment, the sooner the reduced principal lowers the interest for the upcoming months if I make it on the same date as my regular payment in different months. For example, if I already have the money, paying on June 7th will reduce the interest charges more than paying on July 7th.
Is that also the case for a month after that? If I have the funds for the additional payment only on the 25th, is there a benefit to paying it early rather than waiting until the regular payment is due the following month? If I have the funds on the 5th, is it preferable to pay now or wait until the 25th?
The response is that it’s preferable to wait until the end of the month but still make it within the month, at least for my traditional mortgage serviced by Chase. I suspect this is the case at other banks as well.
I made several extra principal payments on different dates this year. Based on the information available in my mortgage account records, I observed that a late extra principal payment decreased the interest owed in the subsequent month by the same amount as an early extra principal payment of the same amount. The date of an additional principal payment does not matter within the month, just as the date of a regular payment does not matter within the 15-day grace period.
Try to make the extra principal payment before the end of the month if you have the funds available, and don’t let it roll over into the next one. You will stop the interest for a full month by the difference of a few days. Your money can earn a small amount of interest in your bank account if you have it at the beginning of the month and wait until the end (without going overboard).
This is only true for mortgages. Car loans and student loans don’t work this way. In those loans the payments go strictly by the days. An end of a month doesn’t make any difference. The sooner you pay the sooner the interest stops.
Ever wondered if there’s a magic day to pay your mortgage that saves you money? While the answer might not be as straightforward as you’d hope, understanding how mortgage payments work can help you make informed decisions about your finances.
Let’s dive into the world of mortgage payments and uncover the truth about payment timing:
The Basics of Mortgage Payments:
- Regular payments: Your monthly payments consist of both principal (the loan amount) and interest.
- Interest calculation: Each month, interest is calculated based on the remaining principal balance.
- Principal reduction: The remaining payment after interest goes towards reducing the principal.
- Decreasing interest: As the principal decreases, so does the interest you pay over time.
Payment Timing and Grace Periods:
- Payment due date: Most mortgages have a due date, often the 1st of the month, with a grace period (usually 15 days).
- Payment within the grace period: As long as you pay within the grace period, it’s considered on time.
- No difference within the grace period: Whether you pay on the 3rd or the 12th, it doesn’t affect your interest or principal reduction.
Extra Mortgage Payments:
- Making a difference: Extra payments applied to the principal can significantly reduce your interest and shorten your loan term.
- Timing matters for extra payments: Making extra payments earlier in the month can save you more interest compared to making them later.
- End-of-month advantage: For some lenders, making extra payments near the end of the month can maximize interest savings.
The Bottom Line:
- Regular payments: The exact date within the grace period doesn’t matter for regular payments.
- Extra payments: Timing can matter for extra payments, especially if you’re close to the end of the month.
Additional Considerations:
- Car loans and student loans: Unlike mortgages, these loans calculate interest daily, so earlier payments always save you interest.
- Emergency funds: Having an emergency fund is crucial, even if you’re aggressively paying off your mortgage.
Remember, consistent and responsible mortgage payments are key to financial stability. By understanding how mortgage payments work and the impact of extra payments, you can make informed decisions to save money and achieve your financial goals.
Let’s discuss your specific situation!
- What type of mortgage do you have?
- Are you considering making extra payments?
- What are your financial goals?
By sharing your details, we can provide personalized advice and help you determine the best approach for your mortgage payments.
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Paying extra on your loan: The RIGHT way to do it! (Monthly vs Annually)
FAQ
What day of the month should I pay my mortgage?
What is the best day of the month to make an extra mortgage payment?
Does it matter if I pay my mortgage on the 1st or the 15th?
What is the best date to pay your mortgage?
When should I pay my mortgage payments?
Most people probably know that mortgage payments are due on the 1st of the month, but many loan servicers (those who collect your payments) will allow you to pay 15 days “late” each month. So even though your mortgage payments are technically due on the first each month, you can pay as late as the 15th every month without any kind of penalty.
How often do you pay a mortgage?
While each payment is equal to half the monthly amount, you end up paying an extra month per year with this method. For example, if you pay $1,200 once per month as your entire monthly mortgage payment, you’re currently making monthly mortgage payments of $14,400 per year. When you change to biweekly payments, you’ll make payments every two weeks.
When is my first mortgage payment due?
Generally, a homeowner’s first mortgage payment is due the first day of the month following a 30-day period after the close. If you’re buying a home and you close on Aug. 30, for example, your first payment would be due on Oct. 1. That means you basically get a month to live in the home mortgage-free.
Should you make monthly mortgage payments?
When most people buy homes using mortgage loans, they make monthly payments. This once-a-month option is common, and it’s convenient as these payments are made on the same day each month. This makes it easy to keep track of your payment due date. For even more convenience, many opt for automatic mortgage payments.