Timing of paying off extra mortgage principal

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guitarguy
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Joined: Mon Dec 20, 2010 3:10 pm

Timing of paying off extra mortgage principal

Post by guitarguy »

Hi All,

We're planning on starting to put ~$1150/m extra on our mortgage principal.

Since I recently was switched from being paid monthly to twice per month, I was wondering if paying ~$1k to the principal in the middle of the month, and then paying the actual monthly payment plus that extra little bit near the end of the month would be a good idea. It would save me a week or 2 of interest on that $1k of principal, right?

I'm trying to figure out whether or not this will make a big enough impact to make taking the time to coordinate paying the bill twice each month will be worth it or not. Would the savings be significant?

I'm not sure exactly how to run these numbers. For the sake of estimation, if someone has a spreadsheet on the ready and wants to run some numbers, we have about $100k mortgage balance at close to 5%.
DSInvestor
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Re: Timing of paying off extra mortgage principal

Post by DSInvestor »

My mortgage servicer allows me to edit the autodebit payment to add extra principal. That's what I did. I didn't want to bother with a second payment mid month.

Here's something from the mortgage professor:
http://realestate.heraldtribune.com/201 ... nts-count/
Jack Guttentag wrote: Is there a best time within the month to make an extra payment to principal?

Yes, the best time within the month to make an extra payment is the last day on which the lender will credit you for the current month, rather than deferring credit until the following month. If it is the 15th, for example, an extra payment made within the first 15 days of January will reduce your balance that month and the interest due in February. Payments made the 16th or later will not be credited until February, and the interest deduction will be deferred until March.

Some lenders will credit payments received anytime during the month, while others are much more restrictive. In most cases, extra payments sent in with the scheduled payment will be credited the same month, but it is a good idea to ask your lender what their rule is.
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FreemanB
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Re: Timing of paying off extra mortgage principal

Post by FreemanB »

You don't really need a spreadsheet, since your only real concern is the interest for the two week period between the middle and end of the month. By my rough calculation, assuming you pay 15 days early(15th vs 30th), the interest on that $1150 would be just over $2. So annually, you'd save around $25. If you can set up the payments to happen automatically, then sure, go ahead. But if it requires any monthly manual payments(I believe my mortgage would require this for this type of setup), then it wouldn't be worth the time and hassle to me over just strictly automated payments at the end of the month.
Twins Fan
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Re: Timing of paying off extra mortgage principal

Post by Twins Fan »

guitarguy wrote:Since I recently was switched from being paid monthly to twice per month, I was wondering if paying ~$1k to the principal in the middle of the month, and then paying the actual monthly payment plus that extra little bit near the end of the month would be a good idea. It would save me a week or 2 of interest on that $1k of principal, right?
No... Sounds like you have a typical mortgage. The interest due is figured once a month when you submit your monthly payment, or when your payment is due and is based off the balance at that time. So, you could pay the extra 25 days prior or two days prior... no difference.

You can earn a little extra interest by leaving it in your account for a couple weeks orthe whole month, if you hae an interest earning checking/savings account.

Don't worry about "daily" numbers on the mortgage. Pay as you can and save interest from the next month on. :beer
Topic Author
guitarguy
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Re: Timing of paying off extra mortgage principal

Post by guitarguy »

Good enough, thanks for the advice all.

I won't bother taking time to make the extra payment mid-month, especially since I'll have to write and mail a check to do it. Not worth my time and the cost of a stamp for such a small amount of savings.
TN_INVEST
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Re: Timing of paying off extra mortgage principal

Post by TN_INVEST »

guitarguy wrote:Good enough, thanks for the advice all.

I won't bother taking time to make the extra payment mid-month, especially since I'll have to write and mail a check to do it. Not worth my time and the cost of a stamp for such a small amount of savings.
Why not use online bill pay? Seems like every bank offers that service. I save lots on stamps and check refills by using my bank's online service.
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jimb_fromATL
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Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Timing of paying off extra mortgage principal

Post by jimb_fromATL »

Twins Fan wrote: No... Sounds like you have a typical mortgage. The interest due is figured once a month when you submit your monthly payment, or when your payment is due and is based off the balance at that time. So, you could pay the extra 25 days prior or two days prior... no difference.

You can earn a little extra interest by leaving it in your account for a couple weeks orthe whole month, if you hae an interest earning checking/savings account.
Edited to clarify my response: Yes, that is the way most mortgages work.

In fact the way loan amortization works; and that normal mortgage payments are processed once-per-month; and the math of how even a tiny extra payment on a regular basis can save so much compound interest over the life of a mortgage are all so misunderstood that there are entire industries of people and businesses who take advantage of our collective lack of knowledge about it.

There have been thousands of MLM mortgage accelerator sales schemes, biweekly payment brokers, payment coupon schemes, tupper-ware-party-like meetings, combined term life insurance and mortgage reduction schemes, and even the mortgage lenders themselves who are skimming money off the top by charging an up-front fee and/or a payment processing fee for biweekly payments or extra payments on the principal, even though you can accomplish the same thing and more by just paying extra on the principal along with your regular mortgage payment.-- for free.

All they really do is hold your money, take a little for themselves, and pay the rest on your mortgage at the normal due date.

Even without fees, the lenders and middlemen can make money. While you might not earn much interest between the middle to the end of the money in your checking account, the lender or middle-man broker can make a lot of money if they get to hold the extra payments for a large number of mortgages for a couple of weeks every month, even though all they can do is put it in low-rate safe holdings.

jimb
Last edited by jimb_fromATL on Tue Jun 03, 2014 9:45 am, edited 1 time in total.
an_asker
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Re: Timing of paying off extra mortgage principal

Post by an_asker »

jimb_fromATL wrote:
Twins Fan wrote: No... Sounds like you have a typical mortgage. The interest due is figured once a month when you submit your monthly payment, or when your payment is due and is based off the balance at that time. So, you could pay the extra 25 days prior or two days prior... no difference.

You can earn a little extra interest by leaving it in your account for a couple weeks orthe whole month, if you hae an interest earning checking/savings account.
In fact the way loan amortization works; and that normal mortgage payments are processed once-per-month; and the math of how even a tiny extra payment on a regular basis can save so much compound interest over the life of a mortgage are all so misunderstood that there are entire industries of people and businesses who take advantage of our collective lack of knowledge about it.

There have been thousands of MLM mortgage accelerator sales schemes, biweekly payment brokers, payment coupon schemes, tupper-ware-party-like meetings, combined term life insurance and mortgage reduction schemes, and even the mortgage lenders themselves who are skimming money off the top by charging an up-front fee and/or a payment processing fee for biweekly payments or extra payments on the principal, even though you can accomplish the same thing and more by just paying extra on the principal along with your regular mortgage payment.-- for free.

All they really do is hold your money, take a little for themselves, and pay the rest on your mortgage at the normal due date.

Even without fees, the lenders and middlemen can make money. While you might not earn much interest between the middle to the end of the money in your checking account, the lender or middle-man broker can make a lot of money if they get to hold the extra payments for a large number of mortgages for a couple of weeks every month, even though all they can do is put it in low-rate safe holdings.

jimb
jimb:

I am confused. Are you disputing what Twins Fan wrote or are you just validating his statement?
The Wizard
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Re: Timing of paying off extra mortgage principal

Post by The Wizard »

TN_INVEST wrote:
guitarguy wrote:Good enough, thanks for the advice all.

I won't bother taking time to make the extra payment mid-month, especially since I'll have to write and mail a check to do it. Not worth my time and the cost of a stamp for such a small amount of savings.
Why not use online bill pay? Seems like every bank offers that service. I save lots on stamps and check refills by using my bank's online service.
My former dim-witted mortgage bank wanted a $2 service charge for online payment, so I said nuts and walked a hand-written check into their local office each month.
But then I re-fied my balance with a HELOC from my Credit Union and do a simple online transfer each month to pay it down.
My payments are credited on the day of receipt for principal & interest. If I make a second payment in the same month, the accumulated interest over the past 15 days (for example) is paid first and the rest goes to principal.
But at a 3.25% interest rate, I'm not in a huge rush to pay it off...
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jimb_fromATL
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Re: Timing of paying off extra mortgage principal

Post by jimb_fromATL »

The Wizard wrote: But then I re-fied my balance with a HELOC from my Credit Union and do a simple online transfer each month to pay it down.
My payments are credited on the day of receipt for principal & interest. If I make a second payment in the same month, the accumulated interest over the past 15 days (for example) is paid first and the rest goes to principal.
But at a 3.25% interest rate, I'm not in a huge rush to pay it off...
HELOCs and other open-ended lines of credit, and a few mortgages held by entities like credit unions may credit payments when received, but the biggest majority of fixed-amount, fixed-payment amortized mortgages calculate the interest at 1/12 of the yearly rate on the previous month's balance as of the normal posting date regardless of when the payment is actually received... as twinsfan described.

So ... for most mortgages there's no advantage in paying it earlier. It's the same result as long as the payment arrives by the due date -- or within the grace period.

Even on loans where the payment is posted when received, if you make regular payments once per month it still averages out pretty close to 1/12 of the yearly rate per month anyway.

The fact that there is a fixed posting date is why biweekly payments and a lot of the other mortgage accelerator schemes and gimmicks work. They all do it by essentially tricking you into paying an average of more than the minimum payment on the mortgage every year to take advantage of the way compound interest works -- in reverse-- by reducing the unpaid balance faster on mortgages and other amortized loans.

jimb
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