A co-worker of mine suggested that paying your mortgage down in two payments per month (i.e. half the monthly mortgage payment every two weeks or so) is noticeably better than one monthly payment. At a guess I suppose this method causes less interest to accrue. Instead of paying interest on (pure example here) $1000 for one month you pay interest on $1000 for two weeks and then on $500 for two weeks.
I have no clue how to work an amortization table to see if this is true. If it is it sure seems like an excellent way to shorten the life of your mortgage without any real added cost to you.
Does anyone know if this really works? Does anyone have any similar ideas on easily shortening your mortgage with little or no added cost?
Well, we have a personal loan that we have to pay once per month. It’s close to a mortgage.
Let’s say that the money is due on the 20th. We make a payment on the 10th, and then on the 20th. The first payment reduces the principle oif the loan, and that means that the interest accrued on the principle is slightly less. When the second payment is made on the 20th, the payment is made, and the accrued interest is smaller than what it would be had we waited.
Are you talking about a biweekly mortgage? This would result in 1 extra payment a year (26 half payments = 13 payments) and of course shorten your mortgage considerably.
You do not pay interest on (another pure example) $1000 a month, you pay interest on $100,000 (or whatever your balance is) a month, I don’t see how paying $500 two weeks early is going to make a dent in the interest on $100,000, but —see sig
Some mortgage agreements stipulate that the calculated interest accrues no matter when the payment is received in the month. Others might see the half payment as being short of the monthly payment and charge a penalty.
And if someone is feeling rich and pays two full payments – thinking that the second one will go to the principal – the second payment might be held and used as the next monthly payment. So in this case, the payer should explicitly say that a given payment is to go towards the principal. And even with that, some lenders won’t accept pay-aheads, as they’ve based their budget on the income from your interest. They don’t want to see the income from your interest go down faster than they’ve planned.
The best people to ask are your mortgage company. Mine provides the once per two weeks plan (they call it “bi-saver”) but only on condition that they can reach into my personal bank account & take the money every 14 days. I didn’t care for that. I asked them why I couldn’t just send in half of my regular payment every two weeks. They said that woud be fine, but the payment they received in the middle of the month would be cashed into their bank, but not credited to my account until the regular due date of my payment.
In other words, they get to play with my money for two weeks before it gets applied to my balance. I have switched to simply making overpayments every month, since I know that at least that will go towards paying down my principle as soon as they get it.
My mortgage company (GMAC) puts little check boxes on the payment stub like such:
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Your monthly payment: $xxx.xx
Amount paid: ________________
What do you want us to do with amounts in excess of the reguklar monthly payment:
use it to pay down your principle
deposit it into a (something) account
Hi Opal!
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Well I can’t remember what the third one is because I don’t have the statement here in front of me but there is a list of 4 or 5 things I can apparently do with my overpayment.
You might want to check with a financial planner before doing this- even in the best case (there are no penalties, and the extra payment is credited towards principal on the day they receive it, etc.) you would probably be better off NOT paying early. Unless your house is at something like a 15% rate, you can usually do better investing in mutual funds, etc.
As an example, it doesn’t make sense to pay off a 7% 30-year loan early, if you can make 10% with mutual funds over the long haul. Of course, this presumes that you actual would invest the money instead- if you are likely to just spend it if you don’t pay extra on your mortgage, you should make the extra payments.
As per above, it’s probably best to consult a financial planner before deciding whether or not to pay extra on your mortgage. Somtimes you’ll be better off investing elsewhere, sometimes not. It depends on way too many factors to get into in this forum.
That said, there are a bunch of ways to pay down a mortgage (if your agreement allows). Here are a few, each of which can cut a 30 year loan to ~18 and save a ton of interest: Bi-weekly payments - This works as explained above - it equals one extra payment per year. Usually must be set up through your mortagage company to make sure payments are credited correctly. Also usually involves a fee and/or auto-debit agreement. Not the best option. Annual extra payment - Simply send an extra payment sometime during the year. Make sure the mortgage company will apply the payment to principal. One plus amortization - Get a copy of your amortization schedule. The first month make a full payment payment plus the next month’s principal. Scratch both months off the schedule. The next month pay a full payment plus month 3 principle. Scratch off month 3. Continue until paid off. This works much the same as the annual extra payment but has the benefit of starting small and growing as (presumably) your income grows. In the early days of a 30 year mortgage your payment is about 1% principal and 99% interest. Sell well - Immediately sell your house for 2-3 times what you paid. OK, so this ain’t the most likely scenario. We can all dream, can’t we.