||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,
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.
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
-- Posted: Sept. 30, 2002