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Save money on simple interest mortgage if pay earlier?

With a simple interest mortgage if I make my payment earlier in the month before the payment is due will I save more money?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

You typically derive no extra financial benefit by making your monthly payment on a simple interest mortgage earlier than the due date because the lender holds the payment in an escrow account until the payment date. Making your simple interest mortgage payment early may benefit the lender because they are able to borrow against the money (your early payment) they hold in the account.

Unless your payment is credited to your account when it is received by the lender; however, it does not reduce your mortgage balance or interest expense. I recommend that you review your mortgage documents and contact your lender to confirm when the lender is required to apply your payment to the account. If the lender is only required to credit your account on your payment due date instead of upon the receipt of the payment, then paying earlier in the month does not provide a benefit.

Please note that a simple interest mortgage is typically inferior to a standard mortgage because the payoff date for a simple interest mortgage is approximately 30 years plus 3 months due to leap days occurring every four years. So the loan term for a simple interest mortgage is longer than the fixed 30 year term for a standard mortgage, which means you pay more interest expense regardless of when you make your monthly payment.

Typically the only way a borrower can make a simple interest mortgage superior to a standard mortgage is by paying more than the required monthly payment, which is known as accelerating the mortgage. For example, if your required monthly payment is $1,800, you pay $2,000 and the extra $200 pays down principal.

Accelerating a mortgage pays down your loan balance faster which reduces the length of your loan -- so you make fewer monthly payments -- and lowers your total interest expense over the life of the mortgage.

Review How Mortgage Acceleration Works

Because the daily interest accrual is calculated based on a reduced loan balance at the end of each month, accelerating a simple interest mortgage provides greater benefits than accelerating a standard mortgage. In short, if you overpay a simple interest mortgage by $200 per month and a standard mortgage by the same amount, you save more money by accelerating the simple interest mortgage.

Use ourMORTGAGE ACCELERATION CALCULATorto see how fast you can payoff your loan

Without having all the information about your situation, unless your lender credits your account upon receipt of your payment, which is unlikely, we recommend that you make your monthly payment on the due date and overpay your mortgage by an amount within your budget.

Accelerating your mortgage does not cost you anything and you simply add the overpayment amount to your monthly payment and note that the extra payment is applied to principal. Additionally, you can accelerate your mortgage by any amount and start and stop at any time over the course of your loan.

Finally, because simple interest mortgages typically do not provide any real benefit to the borrower they are very uncommon. You may want to consider refinancing your current mortgage into a standard mortgage.

Use ourREFINANCE CALCULATORto determine if refinancing makes sense for you

The table below shows mortgage refinance terms for leading lenders in your area. We recommend that you contact multiple lenders to find the lowest rate and fees. Comparing multiple refinance proposals to your current loan is the best way to save money on your mortgage.

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Current Refinance Mortgage Rates as of July 24, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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