If it's daily or weekly, you could make overpayments whenever you like without worrying too much about timing, but the sooner the better. But if interest is calculated monthly, quarterly or annually, you might want to be more strategic and aim to make your overpayments ahead of your interest being calculated.
Rather than delaying credit until the next month, the optimal day within the month to make an extra payment is the last day on which the lender will credit you for the current month.
You could make smaller overpayments each month or overpay with a lump sum whenever you have the cash to hand. Either choice should lead to mortgage savings, but they both have their pros and cons. The main advantage of regular monthly overpayments is that it's more predictable.
A key rule, put forward by Martin Lewis's MoneySavingExpert, is that if your mortgage rate is close to, or higher than, a savings rate, then it is a good idea to overpay.
A quick note here: there is no best day of the month to pay your mortgage. Both the principal and interest amounts decrease over time, whether you make payments on the 1st, 15th, or a date in between.
The 10/15 rule
If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
Generally, your lender expects you to make a payment on the first day of the month, unless you've opted for biweekly payments or you've agreed to split your payments up on the 1st and the 15th. This is true regardless of whether you've got a conventional loan, FHA loan, USDA loan or VA loan.
Making one large lump sum payment instead of gradually overpaying each month will help lower your mortgage balance faster and save you more in interest.
Generally speaking, overpaying your mortgage is always a good idea. When inflation is high, paying more towards your mortgage means the higher rate of interest is applied to a smaller debt, therefore making it more affordable overall.
KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay... That's because when it comes to savings, the reverse isn't automatically true.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Once you've made an overpayment, you can't get a refund – and remember that you'll need to make your monthly payments as usual. Every overpayment you make means you pay less interest overall on the money you borrowed from us. Overpayments do one of two things to your mortgage balance, depending on the amount.
By overpaying, borrowers reduce the balance of their loans and, therefore, the monthly repayments are generally reduced to reflect this. Alternatively, it may be possible to reduce the length of time the mortgage is scheduled to run if you choose to keep your monthly payments the same.
Pay off your mortgage early
“But if you make additional $2,000 payments every month,” explains Bardos, “you'd pay off your mortgage in 6½ years and will only pay $21,900 in interest over that time.” That's a huge amount of money back in your pocket.
This is equivalent to 12 slightly-higher monthly payments of $1,252.85 — but this small difference is enough to pay off your full debt in just 22 years and cost you only $129,712.85 in interest. In other words: two extra mortgage payments per year will save you eight years and $56,798.72 in interest.
It goes down if your property value goes up and as you pay off more of your mortgage. That's why overpaying can help bring it down. A good reason to bring down your LTV is that lenders use this figure to decide which deals they'll offer you. The lower your LTV, the lower the interest rates you can access.
If the repayment method on your mortgage account is part interest and part repayment, any overpayment will be automatically applied to the capital repayment part of your mortgage.
There can be some real benefits—both financial and emotional—to prepaying your mortgage. You reduce your total interest payments, you reduce your monthly spending needs, and you have the security of a predictable financial benefit and the psychological benefits of knowing you are out of debt.
Making additional principal payments reduces the amount of money you'll pay interest on – before it can accrue. This can knock years off your mortgage term and save you thousands of dollars.
Options to pay off your mortgage faster include:
Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
Conventional wisdom, according to Buch and Rhoda (1999), suggests using the “2-2-2 rule” as a criterion for refinancing: “Refinancing may make sense if the interest rate potentially available to you is 2 percent less than you are now paying, if you plan to stay in your home for more than two years, and if the ...
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.