News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from

Mortgage News Reprints
Put entire stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.

Understanding How Early Mortgage Payments Work

The Mortgage Professor: Mortgage repayment: Questions about monthly payment management

Feb. 19, 2016

By JACK GUTTENTAG The Mortgage Professor - Tribune News Service

This is the second of a series on questions about mortgage repayment.

The first article looked at mortgage repayment as a type of investment.

This one is focused on payment mechanics.

Q: Will I save money if I make my regular monthly payment early?

A: No, paying early merely allows the firm servicing your loan to earn interest on your money until the first of the month when your payment is due.

On a standard mortgage, the scheduled payment is due the first of the month, but there is a grace period of 10 to 15 days during which the payment can be made and will be credited as if it were paid on the first.

If payment is received after the grace period, a late fee is imposed, but payments received before the due date are not rewarded for paying early.

An exception is the simple interest mortgage, or SIM, on which interest accrues daily. On these mortgages, every day of delay in making the payment increases the interest cost, and the earlier you pay, the more interest you save.

Q: How do I know if my mortgage is simple interest?

A: Your note should say that interest accrues daily, but it might not.

A sure sign is that the monthly payment on such a mortgage varies month to month, so if your monthly payment is always the same, you do not have this type of mortgage.

Q: What is the best time of the month to make an extra payment?

A: It is the last day of the month for which the lender will apply the payment to the current balance.

If you include the extra payment with your scheduled payment and pay within the grace period, the extra payment will be applied to the current balance.

If you make the extra payment after the grace period, it might be applied to the current balance, or it might not be credited until the following month, depending on the systems and policies of the servicer.

You should find out where the servicer's cutoff is for crediting payments in the current month.

Q: If I make a large extra payment, will my future scheduled payments be lower?

A: On a fixed-rate mortgage, the scheduled payment is not affected by the extra payment. You merely pay down the balance faster.

However, at your request and for a fee, some servicers will reduce the payment to the amount that will amortize over the remaining term. If you want to do this, arrange it beforehand.

On an adjustable-rate mortgage, the scheduled payment remains the same until the next rate adjustment. At that point, the payment is recalculated based on the reduced balance, the new rate and the original term. So unless it is offset by a rate increase, the payment will drop.

Q: What is the difference between an extra payment and an advance payment?

A: An extra payment reduces the loan balance, while an advance payment is the scheduled payment made before the due date.

It is an interest-free loan to the servicing agent for the period until the payment comes due.

Advance payments serve no purpose for borrower s except for the possible peace of mind that stems from knowing that they are ahead of the game.

Q: How does the servicer distinguish an advance payment from an extra payment?

A: The borrower's actions usually indicate the intention.

If the borrower remits a check that is $100 larger than the scheduled payment, for example, the servicer will interpret the $100 as an extra payment and credit it accordingly.

The one ambiguous situation would be where the borrower pays an amount that is an exact multiple of the scheduled payment, which could be intended as several scheduled payments, or as one scheduled payment with a substantial extra payment.

It is up to borrowers to make their intentions clear.

Q: Aren't advance payments necessary if you plan to be out of touch for a long period?

A: No. I spent a year traveling and never made any advance payments on my mortgage. Before I left, I gave my mortgage lender 12 checks dated on the first day of 12 consecutive months. These were not advance payments because the checks would not clear before those dates.

Q: How do I know that the lender has credited my account promptly for my extra payment?

A: You should be able to tell from monthly statements received from the lender that show all transactions during the month by date.

Such statements should be mandatory but they aren't.

Many borrowers receive only an end-of-year statement. The best approach for them is to keep track of their account using Excel spreadsheets I developed for this purpose, then match the results against the end-of-year statement received from the lender.

Q: Can I pay off an adjustable rate mortgage early?

A: It is difficult but doable if you know how.

The reason it is difficult is that the extra principal payments designed to shorten the term reduce the scheduled monthly payment at each rate adjustment, because the new payment is calculated to pay off over the original term.

To offset the decline in the scheduled payment, the borrower must increase the extra payment at every rate adjustment date.

This is a pain, but I now have a calculator that eases the pain substantially.

About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page

To see more of The Mortgage Professor or to subscribe to the newspaper, go to

Copyright (c) 2016, The Mortgage Professor

Distributed by Tribune News Service.

This story was distributed by TNS - Tribune News Service
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.

Copyright © 2016 Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources ( full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

free mortgage news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter


mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

sales blog

secondary marketing

servicing news

subprime news

wholesale lenders

wireless mortgage news