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Ask Dr. Don

When to make the mortgage payment

Dear Dr. Don,
My question deals with making a mortgage payment a few days in advance of the due date vs. a few days after the due date but before the grace period expires.

For example: My mortgage payment is due on the first of each month, but I have until the 15th of the month before the payment is considered late and I am charged a late fee. Does it make sense to make the payment on or before the first of the month or is it better to wait until the 15th to make the payment?

What I am really asking is, does it make any difference in the interest you end up paying for the mortgage, since you are really paying interest in arrears?
Keep up the good work,
Pete Payment

Dear Pete,
As you said, interest is charged in arrears. Your monthly mortgage payment contains an interest component and a principal repayment component. The interest component is based on last month's interest expense. Regardless of when you pay the bill, last month's interest expense isn't going to change.

The grace period gives you 15 days to make the mortgage payment before charging you a late fee. The late fee gives you a financial incentive to make timely payments and compensates the lender for the delay associated with your late payment.

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Paying a few days or even a week before the payment is due on the first will have an inconsequential effect on your mortgage interest expense. You won't incur any additional interest expenses, but the interest savings will be negligible. That's because the early payment only relates to that month's interest and principal components. Five days interest on an $800 mortgage payment at 8 percent interest is about 66 cents. That's why the bank can afford to give you the grace period.

It makes sense to delay your mortgage payment until the end of the grace period only if you can be sure that the payment will be credited to your account on time. In waiting until the 15th to make the payment it's best to use the lender's automated debit procedure. The vagaries of the postal service or the advanced notification provisions in online bill paying programs can make it more difficult to time these payments with the certainty required to avoid late fees.

-- Posted: Sept. 30, 2002

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