PAYING YOUR MORTGAGE ON TIME
Here are some common questions regarding how the date you make your monthly note payment affects the pay out of a simple daily interest loan.
- If you pay your monthly note payments EARLY, the note will pay out earlier than originally scheduled.
Why? With every payment you make, a portion of the payment will go first toward accrued interest and the remaining portion will go toward reducing the principal balance on the note. Interest accrues daily and is calculated from the date that the last payment was made, based on your interest rate and current principal balance. If you make your payment early, there will be fewer days of accrued interest to pay, thus more of your payment will go toward reducing the principal balance. This in turn will reduce the amount of interest that will accrue daily for the next month because this figure is calculated using the current principal balance.
- If you pay additional principal payments, the note will pay out earlier than originally scheduled.
Why? Additional principal payments are applied directly to the principal balance of your note and reduce this balance by the amount of the principal payment made. This lower principal balance will be used to calculate the amount of the next payment that will be applied to interest. Since the principal balance is lower, the amount of interest accrued daily will be lower. Thus, less of your next payment will be applied to interest and more will be applied to principal. By adding extra money to your monthly payment, as long as there are no outstanding fees owed, you are making an additional principal payment and are reducing your principal balance.
- If you pay your monthly note payments ON TIME, the note will pay out similarly to when it was originally scheduled to do so.
Why? By paying your payments on the due date each month, the portion of your payment allocated to interest will closely follow the amount designated in the amortization schedule used to determine your monthly payment when you signed your note. Paying your note payments on time will keep you on track for the loan to pay out according to the original schedule.
- If you generally make your payments AFTER the due date, your note will pay out later than scheduled.
Why? When you make your payment after the due date, you will have more days of accrued interest to pay. Since your payment is applied first to outstanding interest, because of the extra days of accrued interest, a greater portion of your monthly payment will be applied to accrued interest than was scheduled. When a greater portion of your payment goes toward paying the outstanding interest, there is less to pay toward reducing the principal on your note. Thus, you will end up having to pay more payments than originally scheduled in order to pay the note in full.
If you have any questions regarding this information or about paying your mortgage on time, please feel free to call us at 399-1199.
