Nobody likes making mortgage payments. That being said, missing a mortgage payment is much more painful than making the scheduled payment. This will hurt your credit score, negatively impact your ability to qualify for future loans, and cause you to incur hefty late fees. For these reasons, it is incredibly important to understand how mortgage payments work.
When making a mortgage payment, the funds contributed go towards two separate portions known as principal and interest. If you chose to impound/escrow, funds contributed instead go towards four portions as you pay property taxes and insurance alongside the two main portions of principal and interest.
The money allocated to the principal section of the payment goes towards paying down the outstanding balance on your loan. The money allocated towards the interest portion is the price you pay the lender for borrowing the money. Due to amortization, when you first begin making mortgage payments the majority of the funds contributed are allocated toward interest. However, later on in the life of the loan, the majority of funds are allocated toward the principal portion.
Mortgage payments are typically made in arrears with the payment being due on the 1st of the following month. For example, the payment for the month of July would typically be due on August 1st. You will want to check your closing documents to confirm this and know when your first payment is due.
You can make your mortgage payment any time before it is due. Additionally, servicers often allow a 15-day grace period from the due date before you incur any additional fees (although this is not the best habit to fall into). Once a mortgage payment is 30 days late this is where the negative aspects listed above really come into play.
Contributing Additional Funds
Making additional payments or a larger than required payment can be a great financial move and save you a lot of money in interest over the long term. Either way, if you plan on contributing additional money each month to your mortgage payment it is important that you check with the servicer how these funds will be treated. Most of the time any additional funds will go directly towards paying down the loan balance, however occasionally these funds will be treated as partial pre-payments towards next month’s statement.
Other Useful Tips
-Your loan servicer, the company collecting the payments, will likely change occasionally
-Set your loan to auto-pay each month (you will have to redo this every time your loan servicing changes)
-You can recast your mortgage to lower your payment if you have excess cash available
-Remember to make your property tax and insurance payments separately if you choose not to escrow (Some servicers will force an escrow account if this is missed)
-Utilizing any deferment or forbearance on your typical mortgage payments can affect your ability to qualify for another mortgage