Recently, savings accounts have been paying solid returns. Companies like Capital One and Discover were offering an APY of over 4%.
It’s not exactly free money, given the high rate of inflation, but it’s one way to keep your dollars from depreciating compared to putting them in a bank account that earns as little as 0.01%.
When savings rates started to rise a few years ago, I started paying my mortgage later in the month.
The idea was that I could earn more interest on my money if I kept more in a savings account for a longer period of time.
Although maybe not a lot of money, it is more money.
You Don’t Get Any Savings By Paying On The 1st Of The Month
First is a quick overview. Mortgage payments are usually paid on the first day of the month, but not as late as 15 days later.
In other words, most loan officers will give you a grace period to pay anytime between the first day of the month and the 15th without penalty.
So even though it’s “technically necessary” at the beginning, it’s not too late until the 16th. I haven’t looked into why they do this, but this is usually the general rule (always check with your bank/employer to be sure!).
And because most debt in the United States is simple interest and calculated monthly, it doesn’t matter when you pay in terms of interest charges.
If you pay on the first of every month, you won’t save money on mortgage interest compared to paying on the 5th or 15th.
The amount of interest due is already determined and you simply make the previous month’s interest payment.
In short, there is no benefit to paying at the beginning of the month compared to the middle of the month. This is not the case with HELOCs, which are calculated daily.
You Can Get Savings By Paying During The Month
While you won’t see any interest savings by making mortgage payments early in the month, you can see savings if you wait until the middle of the month.
As noted, many savings accounts pay 4% or more currently.
If your mortgage payment is $3,000 a month, you can keep that money in your high-yield account until the 13th.
That would give you a few more weeks of income at any yield, say 4%. And that can mean a higher interest payment at the end of the month on your savings account.
While it may not be a ton of money, it can add up, especially if you have large mortgage payments and/or multiple payments to make.
The interest will also compound over time and make it even more valuable the longer you do this.
This is why I usually pay off my loan close to the 15th of the month. They say every little bit helps.
Pay Off Another High Debt Earlier in the Month Instead
What if you have other high-interest debt that accrues interest every day, 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 daily on the balance.
Obviously, you should strive to pay the balance in full by the due date every month so that it doesn’t happen and you get a “grace period.”
But if this isn’t possible, you may want to pay off more money on that balance (or balances) as soon as possible to reduce interest costs.
Then make sure you pay off the loan before the due date.
In this case, you are essentially giving money to the debt that costs you more money each day.
The mortgage interest due is the same whether it is paid on the first or the 15th day, so there is no benefit to paying it off sooner.
One caveat here is to make sure your payment is cleared on time. That’s why I usually pay on the 12th or 13th to make sure there’s no delay or something.
If there is, you may be charged a large late fee. But be aware that the loan is not considered delinquent until 30 days past the due date, at which time it may be referred to the credit bureaus.
The takeaway here may be to remember that there is no benefit to paying off a mortgage early in the month, but there may be a significant benefit to paying off other debt early, such as a credit card or HELOC.
However, you can still pay off your loan early if you choose, but that involves making additional payments on the principal balance, beyond the regular payment due.
And doing so early in the loan term can save you a lot.
(Photo: Vanessa)
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