If your like me you make extra principal payments to your mortgage.
My wife and I are currently focusing on prepaying one of our mortgages with the highest interest rate. The mortgage is a 30yr fixed @ 6.5% administered by Chase on House #2 (rental). We currently contribute an extra $75/mo for additional principal payments taken out with each monthly auto-debit mortgage payment on the mortgage as well as make additional separate principal payments periodically.
After a period of time I began to wonder how Chase calculates the monthly interest payment. No matter when I contributed a lump sum (of say $1,000) it seemed as though the amount interest calculated on the next monthly mortgage payment wasn’t changing as much when principal payments were made early in the month. I was expecting a sharper drop in the amount of interest paid if I made an extra principal payment at the beginning of the month versus the end of the month (ie. 30days of interest savings). I decided to dig into this a bit to see exactly how this was working.
First I started digging through my mortgage closing papers looking for an explanation of how the mortgage interest was calculated. I couldn’t find much other than interested appeared to be calculated monthly, not daily like I was expecting. That means the interest portion of my mortgage payment is calculated based on a balance once per month, not based on a daily balance apparently like my equity line.
So I tried to validate this with recent transactions on my mortgage. Here is a table of the transaction history on my House #2 Chase Mortgage:
| Date | Description | Payment | Principal | Interest | Ending Loan Balance |
| 7/7/2009 | PRINCIPAL PAYMENT | $75.00 | $75.00 | $0.00 | $89,534.21 |
| 7/7/2009 | PAYMENT | $817.45 | $171.04 | $486.31 | $89,609.21 |
| 6/26/2009 | PRINCIPAL PAYMENT | $6,500.00 | $6,500.00 | $0.00 | $89,780.25 |
| 6/2/2009 | PRINCIPAL PAYMENT | $100.00 | $100.00 | $0.00 | $96,280.25 |
| 6/1/2009 | PRINCIPAL PAYMENT | $75.00 | $75.00 | $0.00 | $96,380.25 |
| 6/1/2009 | PAYMENT | $817.45 | $134.16 | $523.19 | $96,455.25 |
| 5/27/2009 | PRINCIPAL PAYMENT | $100.00 | $100.00 | $0.00 | $96,589.41 |
| 5/1/2009 | PRINCIPAL PAYMENT | $75.00 | $75.00 | $0.00 | $96,689.41 |
| 5/1/2009 | PAYMENT | $809.24 | $132.49 | $524.86 | $96,764.41 |
| 4/27/2009 | PRINCIPAL PAYMENT | $1,500.00 | $1,500.00 | $0.00 | $96,896.90 |
| 4/17/2009 | PRINCIPAL PAYMENT | $100.00 | $100.00 | $0.00 | $98,396.90 |
| 4/1/2009 | PRINCIPAL PAYMENT | $75.00 | $75.00 | $0.00 | $98,496.90 |
| 4/1/2009 | PAYMENT | $809.24 | $122.75 | $534.60 | $98,571.90 |
So then I studied these Loan Balance after each transaction and calculated an interest payment based on that loan balance using a monthly interest calculation. Annual Interest Rate = 6.5% / 12 (monthly payments) = 0.54167% Monthly Interest Rate. The Calculate Monthly Interest Colum is equal to the ending loan balance x 0.54167%.
| Date | Description | Payment | Interest | Loan Balance | Calculated Monthly Interest |
| 7/7/2009 | PRINCIPAL PAYMENT | $75.00 | $0.00 | $89,534.21 | $484.98 |
| 7/7/2009 | PAYMENT | $817.45 | $486.31 | $89,609.21 | $485.39 |
| 6/26/2009 | PRINCIPAL PAYMENT | $6,500.00 | $0.00 | $89,780.25 | $486.31 |
| 6/2/2009 | PRINCIPAL PAYMENT | $100.00 | $0.00 | $96,280.25 | $521.52 |
| 6/1/2009 | PRINCIPAL PAYMENT | $75.00 | $0.00 | $96,380.25 | $522.06 |
| 6/1/2009 | PAYMENT | $817.45 | $523.19 | $96,455.25 | $522.47 |
| 5/27/2009 | PRINCIPAL PAYMENT | $100.00 | $0.00 | $96,589.41 | $523.20 |
| 5/1/2009 | PRINCIPAL PAYMENT | $75.00 | $0.00 | $96,689.41 | $523.74 |
| 5/1/2009 | PAYMENT | $809.24 | $524.86 | $96,764.41 | $524.14 |
| 4/27/2009 | PRINCIPAL PAYMENT | $1,500.00 | $0.00 | $96,896.90 | $524.86 |
| 4/17/2009 | PRINCIPAL PAYMENT | $100.00 | $0.00 | $98,396.90 | $532.99 |
| 4/1/2009 | PRINCIPAL PAYMENT | $75.00 | $0.00 | $98,496.90 | $533.53 |
| 4/1/2009 | PAYMENT | $809.24 | $534.60 | $98,571.90 | $533.93 |
Its readily apparent that the monthly interest calculated is based on the ending balance of after the last transaction of the month before the mortgage payment is applied. I have seen no evidence of adjustments made to the loan balance for principal payments that are applied anytime before the time that the interest is calcaulated. Perhaps these adjustments are made at the time of payoff.
This means a couple things to me:
1) Im wasting a month’s worth of interest on that additional monthly principal payments I am making with my mortgage payment. Rather that contributing the extra $75 principal with my mortgage payment I should be making that payment right before the next mortgage payment and earning interest on that money somewhere else for the month.
2) For seperate additional principal payments I see no advantage of sending in a principal payment before the last possible day of the month - might as well earn interest elsewhere because the mortgage company treats them the same regardless of whether they are received on the 1st or the 30th of the same month.
Read more of The Best Way to Make Extra Principal Payments on Your Mortgage?…
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