Just about to buy a house. I have heard that you can save <fill in the blank> by paying your mortgage in bimonthly payments. This seems to make sense in that you are cutting off 2 weeks of interest each month on half the amount. However, I would like to see it in numbers. Does anyone know a website that will calculate amortization tables?
Have any of the TM paid their mortgage this way?
Thanks
We have a biweekly mortgage. The real trick is that you 26 biweekly segments each year, compared with 12 monthly, or 24 bimonthly. In essence, we’re paying an extra month’s mortgage payment each year. Yes it’s cheaper, but it’s a killer those 2 months each year when we have three payments due.
Two thoughts:
Watch out for any fees associated with bi-weekly payments (like those levied by the employer of a certain moderator, I believe :)). You don’t need to pay a $399 enrollment fee to make payments every two weeks–just send the money in with a note to take the extra payments off principal.
Also, in my view it’s generally much better to take as large a mortgage as you can, for as long a period as you can (though avoiding PMI is a plus). Let your money work for you rather than being tied up in equity in your house. Your house will increase (hopefully) in value no matter how much equity you have.
Another way to cut down on the total interest, with no fees and no third payments, is to get a regular, one payment a month mortgage with no prepayment penalty and pay extra towards the principal each month.
A mortgage broker (or bank, or your mortgage company) should be able to give you a formula to calculate how much money you’d save over time just by making the extra payments to your principal. From what I understand, the bimonthly payments, aside from the extra payment every year mentioned above, are only effective if you have a mortgage where the principal is recalculated every payment - otherwise you’re just making 2 payments a month and not making any difference in the interest. This is what I’ve been told, mind you.
Johnson, what do you mean “take out the largest mortgage possible”? How is that making your money “work” for you? Strikes me as a lose/lose situation… a 167k house will cost 450k after 30 years… I’d rather get it paid off in 15, save 100k in interest and have the 75k in equity, even if I’ve got to do some scraping.
Or, taking the extra money and investing it instead of paying down your mortgage…well, you get taxed on investements, you get taxed on your property - you don’t get taxed on having your loan more paid off… the only thing you “lose” is a bigger tax deduction at the end of the year and keeping the mortgage for the deduction is like robbing yourself to pay the bank, so I’m really confused as to where you’re going here.
I’m all for liquid assets - but I would not sacrifice a payment getting rid of debt to a payment to invest - it’s an investment to be totally debt free & it just doesn’t make sense… even if I was managing to earn 15% interest on my money in say, Janis Funds, and I’m paying out 8% interest on my mortgage, by the time taxes are done with that money I’ve invested, I’ve broken even…maybe.
I’m confused.
Meg
Think of it this way: Mortgage money is probably the cheapest money you’ll ever be able to borrow, and you are paying the interest with pre-tax money, effectively making the interest rate even lower.
So, if you’re paying 7% interest on a house, but you could earn 10% interest investing in the market, then you are far better off paying as little on your house as possible, getting the biggest mortgage you can, and investing all your extra money elsewhere.
As for bi-weekly payments, the only real reason why it decreases your amortization period is the extra 2 payments a year that you are making. The difference in interest only makes a difference if the interest is compounded daily, and even then it’s not much. If you don’t believe me, check into an option of making ‘bi-monthly’ payments instead of ‘bi-weekly’. When you make bi-monthly payments, you typically pay on the 1st and 15th of each month, so you still only make 24 payments a year.
Off the top of my head, I think a bi-monthly option only knocks a few months off the amortization of a 25 year mortgage, while bi-weekly will knock 7-8 years off of a 25 year mortgage.
So, you’ll get almost exactly the same effect by staying on a monthly payment plan, but just making one extra monthly payment a year.
GMAC offered me their “bi-saver” plan, which required an enrolment fee of something like a couple hundred dollars. That was strike one.
The next thing I found out was that even though they received the first half of a payment in the middle of (for example) June, they didn’t apply it to the loan until the actual due date on July 1. That means they are just holding on to your money for two weeks & making interest off of it. Also, because the half payment isn’t applied to the principal until the due date, interest continues to accrue. Strike two.
Finally, they required that I sign up for automatic debit from my checking account. That means they dip in to your finances and you had better be ready to pay out. If you are in a situation where you are not absolutely certain that there will always be available cash, you can’t delay the payment like you could otherwise (taking advantage of the grace period). Strike three.
As I pointed out in the thread about points, anyone who knows how to use a spreadsheet should be able to figure this out easily. If you give me the figures I will give it to you in EXCEL. Just tell me all the terms of both options (principal, interest rate, any fees, etc)
You should also weigh the value of your time and effort in writing and mailing two checks per month (unles it is auto debit).
To whoever said "just send it in twice a month even if you have monthly payments"the answer is “nope”. They will only credit it at the end of every period. Interest and payments are calculated once per period, not as many times as you feel like sending a check in.
what Sam Stone said.
[q]even if I was managing to earn 15% interest on my money in say, Janis Funds, and I’m paying out 8% interest on my mortgage, by the time taxes are done with that money I’ve invested, I’ve broken even…maybe.[/q]
Well, no…unless you’re shifting your money around every year. First off, if you’re paying 8% on your mortgage, you can still probably find better deals. Even if not, taking your deduction into account, you’re effectively only paying 5 1/3% (assuming a 33% state and federal rate). As for taxes on your investments, you only pay on distributed or realized gains. With stocks, that means you don’t pay until you sell. With mutual funds, you only pay on the distributed gains, not the entire gain in value. Again, your house will appreciate at the same rate regardless of the equity you have in it.
If you pay off your mortgage as fast as you can, your return is the appreciation in your house plus the interest rate on your mortgage plus what you earn on your investments after the mortgage is paid off (roughly–I’m not going to do a spreadsheet right now). If you hold a big mortgage for as long as possible, your return is the appreciation on your house plus what you earn on your investments, with your investments starting now, rather than 15 or 25 or 30 years from now when your mortgage is paid off. Remember with “the magic of compound interest,” several percentage points difference in return makes a huge difference over time, and time is of the essence.
johnson wrote:
Not quite. If you have $100000 mortgaged at an 8% rate, and you have 8% in the bank drawing 8% interest, then it’s an exact wash, even after taxes, of whether to pay it off or not. The only question would be whether you like to have cash in the bank.
The reason it balances in that example is that you’re taxed on the interest you earn from your savings, but it’s offset by getting to write off the interest you pay on the mortgage. Exactly.
Some people claim that the tax deduction for home mortgage interest is an encouragement of home ownership, but it’s really just how a balanced tax system has to work. Interest made is taxable, but interest paid out is deductible (they don’t allow you to deduct consumer loan interest in an attempt to discourage this debt). Any tax system that’s been proposed that does away with the home mortgage deduction also does away with taxing interest income, because they need to be balanced in this way.
I just screwed up the codes.
I don’t see any need to “balance” the tax system the way you suggest. I could be mistaken, but I believe the flat tax proposals of several years ago (at least the ones gutsy enough to do away with the mortgage deduction) left interest income taxable, but did not tax dividends or capital gains. Further enlightenment would be appreciated…
Mortgage interest does not have to be tax deductable. In Canada it is not. And yes, allowing interest to be deducted from tax has exactly the effect of manipulating the free market to encourage home ownership relative to other spending and investment, if they don’t have the same benefits.
In the U.S., if you want to borrow $100,000 either for a snazzy new car or a new home, the government is encouraging you to buy the home instead by allowing you to pay the interest with pre-tax income. If there were no taxes at all, or if there were no interest deductions for homes, then the decision point between the two options would move.
