I’ve always wondered about this. My mortgage payment is due on the 1st of the month. They don’t charge a penalty unless I pay after the 15th. If I pay on the 14th of the month, will I end up paying more interest?
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I don’t think you pay more interest. The amount of interest you will pay was determined the day the bank gave you the loan. Now imagine if credit cards gave a two-week grace period after the day the bill is due.
While you can technically get away with doing this, I’m not a big fan. The grace period is there for when things go wrong, like the check gets delayed in the mail, or the bank screws up your bill payment, or whatever else can go wrong these days. If you wait until the end of the grace period, any little hiccup in the payment process becomes a headache.
I did that for quite a few years and didn’t pay any extra. I didn’t cut it that close though, I paid on 10th.
Note what SpeedingLunatic said.
Ive paid on the 16th or 17th (ACH going through s day or two after that) and not hit with penalty. Yes I like to live on the edge!
*Really not, just accidental.
But with my car loan it’s definitely not the case - as I was surprised to discover. It has due date of 5th, and a grace period until 15th. When a payment posts, it gets split into interest and principal, with the interest portion being calculated by the number of days since the last payment. So now I’m making my payments way before the due date. I wonder if this is how car loans usually work, or if this is not typical. (My loan is with a small local bank.)
I don’t think mortgages accrue extra interest during the grace period. Grace period is there so that if you have short cashflow shortfall or money transfer mishap, no action needs to be taken by the lender.
But is it really worth it though? Total benefit is to float 2 weeks of mortgage payment. Say you’re getting 2% on your float for the whole 2 weeks (disregarding money transfer times if any) and a mortgage of $2k, after tax, that scheme makes you less than $30/yr. Meanwhile, if something goes wrong, that could take hit on your credit report and/or cost you fees. So to be safe, you cut 4-5 days off the grace period which means cutting a third of the interest. So now you’re doing the whole trick for less than $20/yr or to generalize, annually, earns about 1% of one monthly mortgage payment.
I have always paid during the grace period. I started it many years ago because the mortgage came out of my 2nd paycheck of the month. When I re-financed a time or two over the years, I never bothered to change the timing on my end. I use the grace period (due on the 1st) to maintain my schedule. During one of my refi’s, I asked the mortgage company about it. They confirmed it would not be an issue to continue to pay around the 15th. I use their auto-pay function and have not had an issue in many years now. This could vary perhaps with the servicers. I have quicken loans. Hope this helps…
I too am one of those who pay during the grace period, 5 days prior to the penalty date. One of my credit cards from PenFed has similar language, I haven’t taken advantage of the grace period on that account.
That is typical for auto loans, they are almost always simple interest that accures daily.