In most cases, you will save no money by making your monthly mortgage payment early. Since mortgage payments are made in arrears, unlike rent payments, there is no benefit by paying early. There are two exceptions to this situation. If you have a simple interest mortgage, such as a home equity line-of-credit, you will save some interest. The second case is when you make more than one mortgage payment each month, as the second amount all goes to reduce principal, which saves you money.
Simple Interest Mortgages
Simple interest mortgages, sometimes called "per diem loans," accrue interest daily based on the outstanding balance and the interest rate. For example, a loan with a $20,000 balance and a 7 percent interest rate accrues $3.83 in interest each day. Making payments in less than 30 days each month will save you some money on simple interest loans.
Since interest is precalculated in most mortgage loans, you will not save interest charges by paying before the due date. However, you could make an early mortgage payment in December and get an extra month's interest deduction in that year. However, you'd only have 11 months of interest deductions in the following year. Except for using this plan, you will not save any money by making your mortgage payment early.
Most mortgage loans have a first day of the month due date and a 15-day grace period. The payment amount and interest charged are the same between the first and the 15th. You don't want to go beyond the grace period, as the late fee can be as much as 5 percent of the payment amount. The larger your mortgage payment, the larger the late fee. However, making your payment before the due date will not save you interest or cash.
Early Mortgage Payoff
If you have the ability, paying off your mortgage in part or in full ahead of its due date will save you many dollars. While making your regular mortgage payment before its due date saves you nothing, paying off your mortgage before its maturity will save you thousands of dollars. If you've made any extra payments during your mortgage term, you've already saved some interest, but not the amount you'll save from paying off or making a large principal payment early.
Instead of saving money, prepaying your mortgage balance could cost you more. Many mortgage loans come with penalties for paying off or making substantial payments on your mortgage early. Since your lender will lose money for early prepayment of the entire or much of the balance of your mortgage, many mortgage loans have penalties for early repayment. While early monthly payments don't trigger penalties, paying off your balance early may generate prepayment penalties in your loan note.
- Keith Brofsky/Photodisc/Getty Images