How to Save Over $80,000 and Get Six Years of Mortgage Payments Off Your Loan
The majority of us pay our mortgage once a month, hopefully. The majority of us also receive a paycheck every two weeks. If we were to deposit half the amount of that month’s mortgage payment into a savings account when we receive our first paycheck, we would make interest on that amount until we removed it to pay our mortgage. It may be a negligible amount, but that is not the point. This long winded explanation is to help better understand how you can reduce a large amount of payments and save thousands of dollars. It is simply to make biweekly mortgage payments every month instead of one payment a month. Since we have half the money when we receive the first paycheck of the month, it would not be preposterous to go ahead and pay half of that month’s mortgage.
Let us say we take out a loan for $250,000 for 30 years with an fixed interest rate of 7%*. The amount due each month comes to approximately $1,660. We choose to go with a biweekly payment which comes to $830. Now let’s look at the final numbers. If we kept paying the monthly payment of $1660, we will have paid out approximately $350,000 just in interest alone! By making biweekly payments we pay approximately $263,000 in interest. That means a savings of $87,000!! It also means that your loan is shortened by 75 months. That’s 6 years and 3 months of payments gone, just by changing when you pay. When I learned the facts and figures of biweekly payments, I called up my bank and asked if I could make daily payments. They said, “That’s very funny.” I said, “I’m not kidding.”
Loan Amount (30 years/7% fixed) and Amount SAVED*
$100,000 $34,500
$250,000 $87,000
$300,000 $103,000
$500,000 $172,000
$1,000,000 $345,000
I find the savings truly amazing, but I find the amount of interest we pay absolutely ludicrous! There are many mortgage calculators that will show you a breakdown of how much principal and interest is paid each month. Let’s use the same loan for $250,000/30yr/7% to see what our break down of what the first month’s payment will be. The monthly payment is $1660. Of that amount, $1455 is interest and $205 is principal!? Now this is just the first month’s payment and each month the interest and principal amounts change. It gets better in the second month; $1454 in interest and $206 in principal. I’m going to stop there, it’s just too disheartening.
One other thing. I have heard of people sending in a weekly payment plan. Some people also pay their monthly payment at the beginning of the cycle rather than waiting until it is due. The lenders will take your money whenever you send it, but that doesn’t mean you gain any benefit from doing so.
Important!
- You cannot just send in biweekly payments. You must call your lender to set it up, otherwise your payments will not reduce any interest!
- Clarify with your lender that the biweekly payment plan is a TRUE biweekly plan. There is also a biweekly plan that is a standard biweekly plan, which is completely different. It is imperative that you get the correct plan.
- Not all lenders accept or are willing to change to biweekly plans. Do research to see if refinancing is a viable option.
*Disclaimer: these amounts are approximates and to keep things simple, they do not include fees and mysterious other charges such as PMI (more on what I think of PMI some other time). The calculations are for demonstration and are approximations. Please seek the advice of a financial advisor when making any changes. I do not guarantee the accuracy of the numbers, spelling or grammar of this article.
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