Does it Pay to Pay a Simple Interest Mortgage Early?
September 18, 2006, Revised April 29, 2008
It always pays to pay a simple interest mortgage early.
"I found that if I paid early one month and made the next payment on the due date, the interest payment went up. So does it really pay to pay early?"
Yes, on a simple interest mortgage, it always pays to pay early.
To convince you, I used my spreadsheet Monitoring Amortization of a Simple Interest Loan to perform an experiment that mirrored your case. Using a $100,000 30-year loan at 6%, I first made the scheduled payment on days 31 and 62. The balance on day 62, reflecting the effects of both payments, was $99,819.60. Then I did it again, except that in this case I made the payments on days 30 and 62. The balance in month 62 was $99,819.50, or $.10 less.
A dime is not a lot of money, but it reflects only one early payment, early by only one month. Over time, the savings grow, the more so as more payments are made early. If you pay every 30 days over the life of the loan, there is a significant shortening of term. See Amortizing a Simple Interest Mortgage.
It always pays to pay a simple interest mortgage early.
"I found that if I paid early one month and made the next payment on the due date, the interest payment went up. So does it really pay to pay early?"
Yes, on a simple interest mortgage, it always pays to pay early.
To convince you, I used my spreadsheet Monitoring Amortization of a Simple Interest Loan to perform an experiment that mirrored your case. Using a $100,000 30-year loan at 6%, I first made the scheduled payment on days 31 and 62. The balance on day 62, reflecting the effects of both payments, was $99,819.60. Then I did it again, except that in this case I made the payments on days 30 and 62. The balance in month 62 was $99,819.50, or $.10 less.
A dime is not a lot of money, but it reflects only one early payment, early by only one month. Over time, the savings grow, the more so as more payments are made early. If you pay every 30 days over the life of the loan, there is a significant shortening of term. See Amortizing a Simple Interest Mortgage.