Mortgage payments

[Victor Hicks]

Two people have the same 30 year mortgage of 220,000 at 6 percent interest. One borrower pays their mortgage ten days early and the other pays their mortgage ten days late. A twenty day spread. First question is how much does the early payer save in interest and the second part of the question is what is the total amount difference paid between the twomortgages?
Meaning, the early payer will end up paying “such in such” less in interest and the late payer will end up paying “such in such” more in interest.

 

[stapel]

What are the contract terms? I mean, the regular payment sent in ten days early is usually counted as just a regular payment. And a payment made ten days late is counted as, well, late, with penalties and such.

What are the rules for your case? Please be complete, showing your efforts so far when you reply. Thank you!

 

[Victor Hicks]

Terms are "Due the first of the month". Neither account is considered late and does not incur late fees because it is not late until after the 15th of month. I was focusing on the "Interest charge compounded DAILY" part of the mortgage.

 

[Victor Hicks]

Sorry that I was not as specific as I see I needed to be. My original question was presented as a hypothetical question. Yes, lets assume it is a 6% annual rate compounding daily. I have had the question in my mind for years now. I have friend who always pays his mortgage late and I always pay my early and I have been under the assumption that I will end up paying less than he will in interest payments over the life of the loan. Thanks for the input.

 

[JeffM]

This is a new post to correct some minor errors in my first post, which I deleted.

Warning: I have been retired for several years, and it was many years before my retirement that I last had to worry about how mortgage interest was calculated. So this is based on recollection plus some simplifying assumptions, such as how rounding is handled and that each month has the same number of days.) In any case, my recollection is that, at least on conventional mortgage loans in the US, interest accrues daily but is credited on the payment due date. That is, there is not daily compounding. There is no penalty for a late payment cured within 30 days of the payment due date, but interest continues to accrue.

As a practical matter, most mortgage loans are paid off long before their contractual maturity because people die, move, or refinance. So another assumption is that we are comparing two mortgages that go full term, which will overstate the normal interest savings.

Anyway, at least approximately, for a loan with an initial balance of $100,000 payable in generally equal monthly installments over 30 years:

Accumulated interest given scheduled payments: $115,825.64

Accumulated interest given payments consistently 10 days early: $114,825.64

Accumulated interest given payments consistently 10 days late: $117,259.20

Savings for paying consistently early versus paying consistently late = $2,433.56.

 

[JeffM]

Difference is peanuts!

Monthly payment is +- $1,320 (220,000, 6%, 30 years).

There is a "net" delay of 1 month by your friend, compared to you.

Denis

Yes, the net delay is not even a month. just twenty days, but those twenty days lap over a compounding date.

To avoid a balloon payment on the final payment, I calculated the monthly payment on a 30 year fixed at 6% p.a. compounded monthly for 220,000 at 1,319.03 monthly.

The person who pays late has a principal balance of 221,100 on the first payment date, 220,000 of original principal plus 1,100 in interest, and accrues further interest over the next 10 days of about 368.50. In other words interest has totaled 1,468.50, but the payment of 1319.03 does not even cover the interest. So, between the two mortgages, the principal balance differs by an increasing amount over the whole thirty year term. It is a peculiarity of accruing daily but compounding monthly. The late payer is not even starting to amortize until his second late payment.

 

[JeffM]

Yes. Thanks Victor for an interesting problem.

Denis, a conventional mortgage in the US has no penalty for lateness if cured within 30 days. Many take full advantage of the grace period in making their payments.

 

[Victor Hicks]

Thank you

Thank you to all who responded to my query. Now I can "let it go" and stop wondering. This represents the internet at its BEST, helping people and sharing information.

 

[Deleted member 4993]

Thank you to all who responded to my query. Now I can "let it go" and stop wondering. This represents the internet at its BEST, helping people and sharing information.

And our volunteers are better than the bestest !!