I’ve been on a mortgage kick, lately, and something in the post about customizing your mortgage jogged my memory. Have you ever heard of the bi-weekly mortgage? If you have, it was probably introduced to you in a breathless and excited voice. Here’s why. Let’s say you have a $100,000 mortgage at 4.5% for 30 years. If you do, you’ll have a payment of $506.69. What happens if you turn that into a biweekly payment? First, you divide the payment in half and get a payment of $253.34. Then, you make a payment every two weeks. How much time does that cut off your mortgage? Check this out:
Biweekly payments, in this case, whittle 5 years off the mortgage and save $14,519.87 in interest. That’s pretty nice! So, how do you get one of these biweekly mortgages? You could pay the bank to set one of these up for you. There’s probably a fee, which I’ve heard ranges from $250-$350. Or, you could make the next best thing, for free, at home!
The secret to biweekly mortgages is that it tricks you into making a full extra payment per year. Think about it: there are 52 weeks per year, which means there are 26 payments per year. You’ve divided the monthly payment by two, which means that you make one full extra payment during the year. So, we take that one extra payment per year, divide it by twelve, and add that to the monthly payment. So, in our example above, the payment would increase from $506.69 to about 549.69. Here’s what happened:
The payoff curve is so close that the two overlapped so that you can’t see the biweekly curve. While the numbers don’t exactly match up, as far as I’m concerned, that’s good enough.
And, may I take a moment to point out, that I only raised the payment by $43 per month, and it cut off five years! What do you think about that? By cutting the mortgage expense, it feels like you’ve received a raise the size of your mortgage payment. Could you think of a use for an extra $550 per month?
I bet you could.
Paying off your mortgage a little early is pretty simple, but it pays off big time in interest saved and by freeing up your cash flow.