Does It Pay to Make Mortgage Payments Early?

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May 10, 1999, revised February 5, 2004

" I consistently pay my mortgage payment two weeks early believing that this will ultimately result in paying less interest over the life of the loan. Is this a correct assumption?"

Sorry to have to disillusion you, but your assumption is wrong. The systems used to keep track of amortized loans understand only one day of the month -- the first. So whenever you pay, early or late, it is recorded as if you had paid on the first. This means that you have been giving the lender two weeks free use of your money. Borrowers who consistently pay late but within the grace period of 15 days enjoy the free use of the lender's money for up to 15 days. Virtue is not always rewarded.

It doesn't have to be done this way, of course. Lenders could credit the borrower the day a payment is received, as they do with deposits. Many advantages would follow, including properly rewarding borrowers like you who pay early, while penalizing those who systematically take advantage of the grace period by paying late.

Simple interest mortgages work this way. They are good for people like you, but bad for most other borrowers who are more likely to pay late than early. See What Are Simple Interest Mortgages?