Mortgage Interest Calculation

[MooseBucks]

How does interest on mortgages work? If I wait until the end of the grace period to pay vs paying early each month do I pay more interest?

Thanks!

[Petunia 100]

You calculate mortgage interest this way:

interest = principal x rate (as a decimal) / 12

No, you do not pay more interest if you pay after the 1st, as long as you pay during the grace period.

So if you owe 100k at 4%, the next month's interest is

100,000.00 x .04 / 12 = $333.34

It is the same if you pay on the 1st or the 4th or the 11th, or any day during the grace period.

[MooseBucks]

You calculate mortgage interest this way:

interest = principal x rate (as a decimal) / 12

No, you do not pay more interest if you pay after the 1st, as long as you pay during the grace period.

So if you owe 100k at 4%, the next month's interest is

100,000.00 x .04 / 12 = $333.34

It is the same if you pay on the 1st or the 4th or the 11th, or any day during the grace period.

Thank you! I had thought that is how it worked but wanted to make sure.

[GoodSteward]

Mortagage interest is compounded monthly on the statement date, meaning only one time a month. This is why it doesn't matter. The "grace period" is just a term to signify you are getting close to that compounding date.

I have known of some special mortagages that break up the payment into two payments, and then compound bi monthly to truely reduce what you pay in. Most that break it up still only compund once a month, so it doesn't really get you ahead any more just makes the payments half at a time. The one I heard of was from citi, and was only offered through their financial advisorish firm Primerica. They don't offer it anymore. Don't know if anybody does.

[greenskeeper]

I have known of some special mortagages that break up the payment into two payments, and then compound bi monthly to truely reduce what you pay in. Most that break it up still only compund once a month, so it doesn't really get you ahead any more just makes the payments half at a time. The one I heard of was from citi, and was only offered through their financial advisorish firm Primerica. They don't offer it anymore. Don't know if anybody does.

bi-weekly 1/2 payments would effectively give you 13 payments per year accelerating the payoff date of the mortgage.

[Petunia 100]

Mortagage interest is compounded monthly on the statement date, meaning only one time a month. This is why it doesn't matter. The "grace period" is just a term to signify you are getting close to that compounding date.

I have known of some special mortagages that break up the payment into two payments, and then compound bi monthly to truely reduce what you pay in. Most that break it up still only compund once a month, so it doesn't really get you ahead any more just makes the payments half at a time. The one I heard of was from citi, and was only offered through their financial advisorish firm Primerica. They don't offer it anymore. Don't know if anybody does.

I have noticed the my Wells Fargo Home Mortgage will apply extra principal payments as soon as I make them. The following month, I owe a tiny bit less interest than I should following the

interest = principal x rate / 12

formula. I was ecstatic when I discovered this. With other mortgages I have had in the past, this was not my experience. I do not know if the law has changed, or if it is because I have my checking account at the same bank and transfer the money online, or some other fortunate circumstance.

To be clear, these are not half payments twice a month. I make a full payment on the 1st, then sometimes pay a little extra later in the month.

[Randomsaver]

I think bi-weekly payments is disadvantageous if one can pay more each month. The reason being is one pays interest each 14 days as opposed to say, putting the extra money that would have been paid on the bi weekly into the 1-time monthly interest fee.

[GoodSteward]

I think bi-weekly payments is disadvantageous if one can pay more each month. The reason being is one pays interest each 14 days as opposed to say, putting the extra money that would have been paid on the bi weekly into the 1-time monthly interest fee.

There are two advantages. One was already mentiond above, it adds up to 13 payments a year(can easily be duplicated by adding extra monthly principal payments). The other is only on the rare loan that offers this, and that is if they compound per payment/bi-monthly, otherwise it is no different than making two half payments on your own.