Distinguishing Payments Accepted and Payments Credited

"Is there a limit on the number of mortgage payments one can make in a given year?"

This question turns out to be a little more complicated than appears at first glance. The reason is that lenders may accept a payment without necessarily crediting it to the borrower’s account at that time. That means that your question is really two questions. One, how many times a year will a lender accept the borrower’s payment? Two, how many times a year will a lender credit the borrower’s account?

To illustrate the distinction, some lenders have weekly payment programs under which they accept payments every week. However, they credit the payments to the borrower’s mortgage monthly. They thus accept 52 payments a year but they only credit 12 times a year. The credits are the same as if the borrower paid monthly.

In effect, the borrower paying weekly is making his monthly payment early, which gives the lender the use of his money until month-end. It doesn’t amount to a lot but it certainly compensates the bank for the additional processing expense.

The Distinction Applies to Biweeklies

The same distinction applies to biweekly payments. On biweekly programs that are run by third parties, the borrower pays biweekly but the lender credits the payments monthly. The interest earnings on the borrower’s money, which is held by the third party until the monthly payment is due, is part of the income of the third party. Most of them also charge the borrower a fee.

A biweekly program offered by a lender may go either way. Some lenders credit the biweekly payments biweekly, some monthly. On a $100,000 loan at 6% for 30 years, the biweekly that credits payments monthly pays off in 297 months and total interest payments are $92,193. The same loan with payments applied biweekly pays off in the equivalent of 294 months, and total interest is $91,022.

 These numbers are derived from calculators 2b, Biweekly Payments Applied Monthly; and 2bi, Biweekly Payments Applied Biweekly.

Copyright Jack Guttentag 2007