By Tom Reddin
That was an easy question to answer. My No. 1 piece of advice for recent homebuyers is to switch from the traditional monthly mortgage payments to either weekly or bi-weekly payments.
Why? Because it’s the least painful, simplest way I know to shave approximately four years off the life of a traditional 30-year fixed rate mortgage. Here’s what you need to do.
First, contact your mortgage lender to set up automatic withdrawals from your bank account for your mortgage payments. While you could theoretically achieve the same result by mailing in your payments, the vast majority of people won’t have the discipline to stick to this alternate payment schedule if it’s not set up as an automatic withdrawal.
Next, ask your lender to establish a payment every two weeks. Take your monthly mortgage payment and divide it by two to come up with your payment amount. For example, if your mortgage payment is $1,000 a month, your payment should be $500 every two weeks. You could also establish weekly payments instead, which would be $250 a week instead of a $1,000 monthly payment.
This simple change in your payment schedule will cut approximately four years off of a traditional 30-year fixed rate mortgage. Check with your mortgage lender for an exact calculation of the reduction in years based on your individual circumstances.
Sounds painless and too good to be true, doesn’t it? Here’s how it works. If you make payments every two weeks, you’re making 26 payments a year. Since each payment is half of your normal monthly payment, take the 26 payments and divide by two to arrive at the monthly payments you are making each year. Twenty-six divided by two results in 13 monthly payments that you’ve made each year instead of the 12 monthly payments that you would normally make under a traditional payment schedule. The same mathematical result occurs if you establish a weekly payment schedule at one-fourth the amount of your normal monthly mortgage payment.
So, you end up paying an extra monthly payment on your mortgage each year, which has an impact on the compounding effect of the interest on your mortgage. Most homeowners would be hard-pressed to come up with an additional mortgage payment at the end of each year, so this is a great way to accomplish some forced savings in a manner that most people don’t even feel.
And this is not just for new homebuyers. Many existing homeowners are asking themselves, “Should I refinance?” If you decide to refinance your mortgage to today’s low interest rates, make sure to consider this option when you set up your new mortgage.
Finally, consider this scenario: You might have a child in college during those last four years of your mortgage. The absence of your mortgage payments might be the solution to paying tuition for those four years of college.
Tom Reddin, former president of LendingTree, writes for the Charlotte Observer about mortgages and home ownership. A version of this column previously appeared on his blog, MortgageRates.us. He runs Red Dog Ventures, a venture capital and advisory firm for early-stage digital companies.
©2013 The Charlotte Observer (Charlotte, N.C.)
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