When should you make that payment?
Whether you are paying off your electric bill, credit card bill, or home mortgage payment, most people wait until the payment due date to make the payment. If they do not make it on the actual due date, they may make a day or 2 before.
There are different reasons why people do this. Those reasons may include that you do not want the bank or company you owe to get your money any sooner than required - after all, it is your money right? Or perhaps you have an interest bearing checking account that pays you 1.5% so you want that money to stay in your account until the last possible second. However, if you are paying off a revolving credit account, such as a home mortgage, you may actually be hurting yourself with that logic.
Interest is usually calculated daily on the amount you owe on the account. Here is a scenario:
1. Your home mortgage is at 6% and your interest bearing checking account pays you 1%, so the difference is 5%
2. Let’s assume your mortgage is $1000 to keep the math simple. Your payment is considered late on the 15th of the month.
3. If you make the payment on the 1st day of the month verses the 15th, you are going to earn 5% (difference in mortgage rate verses checking account) on $1000 for 14 days. You earn about $.14 cents a day on that interest ($1000 X .05 / 365). Multiply that times 14 days and the result is $1.92.
You may say that $1.92 is not much, but let’s say you have a 30 year mortgage. You make 360 payments over the life of that mortgage loan. If you made your payment on the first of the month rather that on the 15th day of the month, you would save $690 ($1.92 X 360). That is over half of a month’s payment.
If is obvious to see that you will not save a great deal by invoking this strategy, however, you will save some. Over the life of the loan, you can see where this will add up and save you a little more money. If you can afford to make the payment early, it could be to your advantage. Remember, every little bit helps in this day and age!
Whether you are paying off your electric bill, credit card bill, or home mortgage payment, most people wait until the payment due date to make the payment. If they do not make it on the actual due date, they may make a day or 2 before.
There are different reasons why people do this. Those reasons may include that you do not want the bank or company you owe to get your money any sooner than required - after all, it is your money right? Or perhaps you have an interest bearing checking account that pays you 1.5% so you want that money to stay in your account until the last possible second. However, if you are paying off a revolving credit account, such as a home mortgage, you may actually be hurting yourself with that logic.
Interest is usually calculated daily on the amount you owe on the account. Here is a scenario:
1. Your home mortgage is at 6% and your interest bearing checking account pays you 1%, so the difference is 5%
2. Let’s assume your mortgage is $1000 to keep the math simple. Your payment is considered late on the 15th of the month.
3. If you make the payment on the 1st day of the month verses the 15th, you are going to earn 5% (difference in mortgage rate verses checking account) on $1000 for 14 days. You earn about $.14 cents a day on that interest ($1000 X .05 / 365). Multiply that times 14 days and the result is $1.92.
You may say that $1.92 is not much, but let’s say you have a 30 year mortgage. You make 360 payments over the life of that mortgage loan. If you made your payment on the first of the month rather that on the 15th day of the month, you would save $690 ($1.92 X 360). That is over half of a month’s payment.
If is obvious to see that you will not save a great deal by invoking this strategy, however, you will save some. Over the life of the loan, you can see where this will add up and save you a little more money. If you can afford to make the payment early, it could be to your advantage. Remember, every little bit helps in this day and age!