Building and keeping a good credit profile is one of the keys to financial well-being. For those who have yet to buy and finance their first home, they may not yet realize how important timely mortgage payments are and how they impact a credit score. What are the benefits of a timely mortgage loan repayment?
Mortgage payments are made in arrears, exactly the opposite of how rent works. When rental payments are made, the payment is for the preceding month whereas with a mortgage, the payment is for the daily interest accrued from the previous month in addition to a portion toward the principal balance. Mortgage loans are due and payable on the first of every month and most loans have a grace period up to the 15th of the month without incurring a late payment penalty.
This date typically coincides with the payroll dates for many employees but if the payment is 16 or more days late, the lender might begin to make a few courtesy calls to check up on you. If you pay on the first of the month, every month, you will avoid any collection activity from your lender and avoid additional late charges. When a payment is made more than 15 days past the due date, a typical late charge is 5.0% of the monthly payment.When building ore rebuilding credit, the absolute best way to quickly improve scores is with a timely mortgage payment. Credit scoring weighs different types of credit differently. For example, a loan from a finance company might even harm a credit score whereas a mortgage payment has the most positive impact.
Paying a mortgage on the first of every month will improve your scores quicker than any other method. Some borrowers finance a home with a loan program designed specifically for those who are credit challenged. Such loans will require a greater down payment and higher interest rates. By making timely mortgage payments on such a loan, the borrowers will be eligible to refinance out of the higher rate mortgage into a conventional one.
Yet if payments are late, that eligibility may not arrive. Credit reports will show payments made more than 30, 60 and 90 days past the due date. That means if you make your mortgage payment on the 20th of the month and incur late charges, the credit report won’t reflect that late payment. However, once a payment is made more than 30 days past the due date, credit scores will begin to plummet. Many borrowers set up their mortgage payment on an automated draft on the first of every month coinciding with their pay day.
Making a mortgage payment on the first of every month in this method not only eliminates possible late payment charges but makes credit scores go up over time.