So I made my first mortgage loan payment on the 17th (14 days early). My question is how the payment should have been allocated.
I work in the auto finance business as an underwriter. When we originate a loan it is "simple interest" meaning your interest is broken down into a daily interest charge or "per diem". When a payment is received it is first applied to the daily interest charge, then to principal. With this method, paying your payment early has the effect of lowering the total amount of interest you pay over the life of the loan.
So under this method my daily interest on my mortgage is $16.93. Since I went 17 days before making a payment (loan start date of 8/1/2012) my accumulated daily interest should have been $287.81. They instead allocated $514.98 toward interest.
Is this correct? Are mortgage loans not simple interest?
If this is correct, then there is no benefit to paying your mortgage early, and no penalty to pay late (just before the late charge hits).
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