Lately, savings accounts have been paying pretty good returns. Companies like Capital One and Discover have been offering an annual return of over 4%.
It’s not necessarily free money, given the high inflation rate, but it was one way to keep the value of your dollars from eroding rather than just putting them in a bank account and earning just 0.01%.
When savings rates started to rise a few years ago, I started making my mortgage payments later in the month.
The logic was that I could earn more interest on my money if I kept more of it in a savings account for a longer period of time.
While it may not be a large amount of money, it is still a larger amount of money.
You will not get any savings by paying on the first of the month.
First, here’s a quick overview. Mortgage payments are usually due on the first day of the month, but they can’t be delayed until 15 days have passed.
In other words, most loan providers will offer you a grace period to pay any time between the 1st and 15th of the month without any penalty.
So, even though the deadline is “technically due” on the 1st, it actually doesn’t go until the 16th. I’ve never looked into why they do this, but this is the general rule (always check with your bank/provider to be sure!).
Since most mortgages in the United States are based on simple interest and are calculated monthly, it doesn’t matter when you pay in terms of interest charges.
If you pay on the first of each month, you won’t save money on mortgage interest compared to paying on the 5th or 15th.
The amount of interest due has already been determined and all you have to do is pay the previous month’s interest.
In short, there is no benefit to paying early in the month compared to paying mid-month. This does not apply to home equity lines of credit, which are calculated daily.
You can save money by paying in the middle of the month.
Although you won’t see any interest savings by making your mortgage payments early in the month, you may see savings if you wait until closer to the middle of the month.
As we noted, many savings accounts pay 4% or more right now.
If your mortgage payment is $3,000 per month, you could keep that money in your high-yield account until the 13th.
This would give you a few more weeks of profits at whatever the yield is, say 4%. This means paying higher interest at the end of the month into your savings account.
Although it may not be a large amount of money, it can add up, especially if you have larger mortgage payments and/or multiple payments to make.
The interest will also compound over time and make it more valuable the longer you do it.
That’s why I usually pay off my mortgage closer to the 15th of the month. They say every little bit helps.
Pay off other high-interest debts early in the month instead.
What if you carry other debts that have a higher interest rate and accrue interest daily, such as a credit card?
Many Americans have revolving credit card debt that is not paid in full each month. As a result, interest accrues every day on the outstanding balance.
Obviously, you should strive to pay the balance in full by the due date each month so that this does not happen and you get a “grace period.”
But if this is not possible, you can ask to pay as much of that balance (or balances) as soon as possible to reduce interest expenses.
Then make sure to pay off the mortgage before the due date.
In this scenario, you are essentially setting aside money to pay off debt that is actually costing you more money every day.
The mortgage interest due is the same whether it is paid on the 1st or the 15th, so there is no advantage in paying it early.
The only caveat here is to make sure you pay on time. That’s why I usually pay on the 12th or 13th to make sure there’s no delay or anything like that.
If so, you may be charged a hefty late fee. But note that a mortgage is not considered delinquent until 30 days past the due date, at which point it can be reported to the credit bureaus.
The lesson here may be to remember that there is no benefit to paying off your mortgage early in the month, but there may be a significant benefit to paying off other debts early, such as a credit card or HELOC.
However, you can still pay off your mortgage early if you choose, but this means making additional payments to the principal balance, in addition to the regular payment due.
Doing this early in the loan term can save you more money.
(image: Vanessa)
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