Save Money By Paying Your Mortgage Bi-Weekly

Here's a piece courtesy of the e-book Banking Secrets Revealed:

Most people are accustomed to making one mortgage payment each month, usually on or about the 1st day of the month.  Did you know that you can save thousands of dollars over the life of your mortgage by making one-half of your payment every two weeks instead of your whole payment once per month?

When you pay your mortgage once per month, you’ll make 12 payments during the year.  By paying your mortgage every two weeks, you’ll make 26 bi-weekly payments or the equivalent of 13 monthly payments.  You’ll be making one extra monthly payment per year which shortens the term of your mortgage and saves you thousands of dollars. 

The savings using a bi-weekly payment schedule can be substantial.  Assuming a $200,000, 30-year mortgage at 6.5%, your savings would total over $60,000 and the term of your loan would be reduced by six years. 

Call your credit union or bank about bi-weekly mortgage payments.

Comments

[Ray]

By paying less interest, that would cut into your tax deduction right? Which way is better: to have a shorter term or a bigger tax deduction?

[EMF]

If you're charged a fee to do this, don't set up such a plan. Some plans charge several hundred dollars to set this up, and several dollars with each payment.

If you want to pay extra on your mortgage, approximately every 6 months will have 3 paydays. On those months, send in an additional half-payment. The few minutes it takes to circle your paydays on a calendar and look at it every month before sending in your payment will "earn" a lot of money if you do this instead of paying fees.

And for sure don't do this if you still have credit card debt.

[JM]

I have heard that some banks don't let you do this, although my bank doesn't care how much I pay so long as its as much as I owe every month.

I have also heard, from an insider in the industry, that there are companies that 'specialize' in doing this for people who can't do it through their bank, but it is a huge scam, because what they do is take your extra payment every month and invest it for their own gain. Then at the end of the year, they send in your extra payment and bank the profits from the investments. While thats still technically an extra payment per year, its probably not as good of an interest reduction over the life of the loan as that little bit extra every month would be.

Finally, not everybody can afford the 1/12 of their mortgage payment every month, but a another more affordable idea would be to simply round up your payment to the nearest $10 or $50 (making sure the bank understands that extra $$ should go towards principle). While that may not give you quite as much savings at the end of the loan, over 30 years, even a few dollars a month extra towards principle can save you thousands of dollars.

[Mark]

My bank charges a fee if I want to make payments every 2 weeks. However, I can add 1/12 to my monthly payment for free. So I set it up online to add that amount as extra principle, and at the end of the year I've made an extra payment.

[Ryan]

Or alternatively, you could just get a 15 year mortgage instead of a 30 year mortgage and you'd have a lower interest rate to boot.

[Matt]

The first comment about paying less taxes:

If you're in the 25% bracket and pay $10,000 in interest, you save around $2,500 in taxes. I think I would rather have the $7,500 :)

[Scott Kustes]

I second what EMF says about not doing this if they charge a fee. Unfortunately, I didn't consider that before I set mine up for an extra $15 each of the first 25 payments (I hadn't yet found all of you savvy personal finance gurus). However, on my mortgage, it will knock off 6.5 years and ~$42K in interest, so eating that $375 isn't that big of a deal.

[Ryan]

What I'm basically saying in my last post is if you are planning on sending a larger payment towards your mortgage anyways, you might as well get a shorter term loan in the first place with a lower interest rate.

[Compounding]

Well, there has been a lot of discussion about this recently. This can and will save you money... about 8 years worth of mortgage payments. However, you can very easily do this yourself, and yield better results. It is fairly simple if you follow these steps:

1. Divide your mortgage payment by 12

2. Add "Step 1" to your total mortgage payment

3. Divide "Step 2" by 2

4. Setup direct deposit of the amount in "Step 3" to a high-yield savings account

5. Have your mortgage company ACH the value of "Step 2" from your savings account each month.

What does this do? Well, you make twelve payments, but you put an extra 1/12 to principle each month. You also earn interest on the money while it is sitting in your account. Also, at the end of the year, you will have value of "Step 2," plus interest, sitting in your savings account. This could be applied to your mortgage as a "14th payment" or could be used to build your savings goals.

Why is this better? Well, there are two reasons:

1. You pay no fees, at all.

2. In the typically bi-weekly system, the company managing the payments actually holds onto the extra amount until the very end of the year. This is counter productive because it isn't lowering your principal towards the end of the year, so you are paying interest on money that you already paid... plus they are earning interest on your money.

Steer clear of the bi-weekly programs and do-it-yourself.

[Matt]

If you are more disciplined, a better option is to put that extra 1/12 of a mortgage payment in a savings account/investment account and pay off your mortgage in a lump sum. As long as you can invest your money at better than the interest rate minus tax deduction (on a 6% loan, you need to get more than ~4.5%), you'll pay off the loan faster than if you had made the extra payments in principle.

This plan requires more discipline since you have a big hunk of money you have to not touch but it will pay off the loan sooner.

Another option is to plan your house purchase based on the monthly payment of a 15 year loan but get a 30 year loan. Make extra payments each month in the amount of the difference between the 15 year payment and the 30 year payment and you'll pay off the mortgage in about 11 years.