Regular mortgage payments are set up such that you pay the same amount each month but the breakdown between principal and interest changes every 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.
All the mortgages I’ve had make the monthly payment due on the first day of each month but they also give you a 15-day grace period. As long as you pay within the grace period, it’s as if you paid on the first. It doesn’t make any difference whether you pay on the 3rd of each month or you pay on the 12th. 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.
After the new tax law passed late last year, I resolved to pay off my mortgage as soon as I can. With the new $10,000 limit on deducting state and local taxes and the expanded standard deduction to $24,000 for married filing jointly in 2018, I don’t get any additional deduction for the mortgage interest any more. I will switch to the standard deduction.
This means making extra payments that apply to the principal. If I make the extra payment together with my regular payment on the same date in different months, obviously the sooner I make the extra payment, the sooner the reduced principal lowers the interest for the following months. For instance if I have the money already, paying on June 7th is better than paying on July 7th in terms of lowering the interest charges.
Is that true within a month as well? If I have the money for the extra payment only on the 25th, is there any advantage in rushing it before the end of the month versus waiting until the regular payment in the following month? If I have the money on the 5th, is it better to pay on the 5th or is it better to wait until the 25th?
The answer, at least for my conventional mortgage serviced by Chase, is that it’s better to wait toward the end of the month but still make it within the month. I suspect this is the case at other banks as well.
I made several extra principal payments on different dates this year. From my mortgage account records, I saw that an extra principal payment made late in the month reduced the interest due in the following month by the same amount as an extra principal payment of the same size made earlier in the month. Just like the date for a regular payment doesn’t matter within the 15-day grace period, the date for an extra principal payment doesn’t matter within the month.
If you have the money near the end of a month, try to make the extra principal payment before the end of the month and not let it slip to the following month. You will stop the interest for a full month by the difference of a few days. If you have the money at the beginning of a month, when you wait toward the end of the month (but not cut too close and pass the end), your money can earn a little bit of interest in your bank account.
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.
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