Yes, you can chop tens of thousands off your mortgage — without writing a big balloon payment check or forgoing a windfall to pay principle.
The trick is to make biweekly payments, rather than one payment a month, for the life of the mortgage.
The strategy is easier said than done for most mortgage owners. However, it’s a proven model that you can test mathematically, and it can save you almost $59,000 off a typical mortgage.
This financial strategy works by setting up a simple biweekly mortgage payments schedule. Using this method, the borrower commits to paying mortgage every two weeks instead of once a month.
This payment strategy and practice has many benefits. Homeowners making two payments a month are able to chip away principle at a faster pace.
In the end, you are making 26 annual mortgage payments instead of the traditional 12 annual mortgage payments.
Consequently, the more that you pay on your mortgage, the lower your interest payments will be in the long haul.
According to home selling website Zillow, the median home price is $250,000.
Depending on your mortgage loan agreement and interest rate, interest is due on the mortgage daily.
“A biweekly payment plan is far more effective than merely sending one additional payment per year,” said Michael Hausam, a realtor and mortgage broker operating in Newport Beach, California.
Hausam stresses that the biweekly mortgage payment method is a strategic method for reducing interest over the lifetime of the mortgage.
“Your loan balance accrues interest every day and reducing that principal balance every 14 days (26 half payments per year) saves more in interest charges than one full additional payment every 12 months, even though the total amount in payments every year remains the same.”
Depending on the circumstance, by employing biweekly mortgage payment strategy, homeowners can save almost $59,000 over the life of the mortgage.
Take into account that the average 30-year mortgage is for $200,000 with a 6.5% interest rate.
Such an amount would require the homeowner to pay $1,264.14 per month.
By employing the biweekly mortgage payment strategy, the homeowner pays $632.07 every two weeks — half the monthly bill, but paid twice a month.
This payment strategy ends up cutting six years of payments off the loan. The homeowner in this example saves about $58,747 in payments as well.
Lisa Orban, an Illinois-based homeowner and author, uses biweekly mortgage payments to whittle down payments and overall interest.
“I pay biweekly for a number of reasons, but the primary one is almost immediately more money is put towards the principal rather than the interest,” said Orban.
“The payment on the first of the month more goes towards interest, but the payment on the 15th shifts and more money is put towards the mortgage loan principal,” adds Orban.
Remember that not all mortgages agreements permit a biweekly payment strategy. Talk to your lender before employing such a payment strategy.
If you can’t use this strategy, you have options, says Elisa Meyer, personal finance specialist. She says just add any money you save every two weeks to your mortgage.
Also use year-end bonuses, tax refunds, and any other financial windfalls to make an extra payment every year.
Here’s another way: Calculate your monthly mortgage payment and divide it by 12.
Now, add that amount to your monthly payment. It’ll count as an extra payment every year.