Paying your bill twice, but Half each tie does save you some years.
OT: Mortgage loans
- Thread starter jedi_mike
- Start date
I would love to see the math of it saving years. Making an extra entire monthly payment a year by having the mortgage lender agree to accept bi-weekly payments saves less than 7 years in the examples I linked. Amortizations on mortgages are figured on the remaining balance at the time of payment and the interest rate. Making part of a payment half a month early will save a little (very little) interest assuming the lender has agreed to accept the payment and credit it in that way. Not enough to shave years off the mortgage.
In this example it saved one month over 30 years.
https://budgeting.thenest.com/making-semimonthly-payments-mortgage-save-money-23747.html
A semimonthly payment schedule won't save you much money. With this plan, you are making two payments per month instead of one, adding up to the equivalent of 12 full payments. By making semimonthly payments on a 30-year mortgage, you’ll pay off your loan in 29 years 11 months – only one month sooner than if you were to make monthly payments.
Consequently, you’ll save only the amount of one month’s worth of interest over the life of your loan. However, making half your regular mortgage payment every two weeks, or biweekly, will save you a bundle.
https://everythingfinanceblog.com/5455/the-advantages-of-a-semi-monthly-mortgage-payments.html
. When you only make one payment a month, the interest balance can continue to accrue over 30 or 31 days. With semi-monthly payments, the interest never accrues more than 15 days. For instance, if you have a mortgage for $200,000 at 5% interest for 30 years, you would pay $186,513.10 on a traditional mortgage that is paid once a month. However, if you pay on a semi-monthly basis, your overall interest paid over the life of the loan is $186,339.34, or $173.76 less over 30 years.
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You are correct. I did bi-weekly payments which result in an additional payment each year. I also rounded up my payment to the nearest hundred. Saved over 7 years by doing so. Splitting payments also works...IIRC saves about 4 years.
Some of those floor plans for homes like this are fabulous. Nice kitchens, bathrooms, etc; and not scaled to fit the typical 3 BR house.
FYI....nothing wrong with having a mortgage after retirement....as long as you can afford it.
It's not uncommon for people to move to another home once they retire, or even pick up a 2nd residence if they want to travel.
It's not uncommon for people to move to another home once they retire, or even pick up a 2nd residence if they want to travel.
Exactly what we are going for. Master bedroom, same size as we have now, but master bath and closet are both as large or larger than the bedroom. Same for laundry/pantry. We know (or think we do) what we want at this stage in life.
Honestly, I wanted to go Barndominium. Wife said she's not living in a "barn", so that was that.
My personal plan is this:
1. Keep my 30 yr mortgage - provides me more flexibility to adjust my plans in the future and I can always pay more down
2. Prioritize investing over more money against the mortgage. Other than making my January mortgage payment each year on 12/31 I’m not putting any money extra into my mortgage payment. Ok, I do round up the payment each month about $60 but only so I can pay a nice, pretty even number for my own sanity.
3. I do work with a CFP and one of my goals is to at some point make a fat payment to pay off my house once we hit “the magic number” of total cash/total equity investments. I will surely take a tax hit when this happens but for me I’m willing to do it since I value the idea of having zero debt, which this would provide me. It will take me some time to build things back up but it will be freeing having the increased cash flow at my disposal to do so.
I always appreciate threads like this…pick up on some good (and sometimes not so good) advice but I try to learn from it all
1. Keep my 30 yr mortgage - provides me more flexibility to adjust my plans in the future and I can always pay more down
2. Prioritize investing over more money against the mortgage. Other than making my January mortgage payment each year on 12/31 I’m not putting any money extra into my mortgage payment. Ok, I do round up the payment each month about $60 but only so I can pay a nice, pretty even number for my own sanity.
3. I do work with a CFP and one of my goals is to at some point make a fat payment to pay off my house once we hit “the magic number” of total cash/total equity investments. I will surely take a tax hit when this happens but for me I’m willing to do it since I value the idea of having zero debt, which this would provide me. It will take me some time to build things back up but it will be freeing having the increased cash flow at my disposal to do so.
I always appreciate threads like this…pick up on some good (and sometimes not so good) advice but I try to learn from it all
Yep. Congrats. Took us 8 years to pay off our 15 year loan.
Maybe saves a month without paying extra. In the example I gave above it saved less than 180 bucks total over the 30 years.
Are you reducing the principle with the first payment? Paying early that is what comes down first (which reduces the principle that the remainder of the month's interest is calculated on). It's not much at first, but has a huge effect over a long period of time.
Plus any total monthly payment over the interest due for that month (based on a recalculated interest) also goes to reduce principle....whether it's less than a dollar or well over.
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Yes I am. I linked to examples above. It is not a huge effect without paying extra on the mortgage. Because it is only a little bit of interest impacted by the two weeks earlier payments.
For instance, if you have a mortgage for $200,000 at 5% interest for 30 years, you would pay $186,513.10 on a traditional mortgage that is paid once a month. However, if you pay on a semi-monthly basis, your overall interest paid over the life of the loan is $186,339.34, or $173.76 less over 30 years
The calculator I saw reflected a much greater effect over a 30 year period. That was a while back but usually I used an AICPA calculator at that time.
I went with bi-weekly because the small bank that held my mortgage didn't charge to do it or to round-up my payment....and I was paid every two weeks so it made it easy.
Hugh Chou is great with loans and other financial calculators. I have done these by hand way back when I was going to Carolina. But using loan calcs is a great way to play around with different scenarios. You can run the numbers on this one using semi-monthly or monthly or whatever figures you want. Hugh is a financial geek and is not selling anything. He has a ton of cool calculators on his website.
https://www.hughcalc.org/genloan.cgi
https://www.hughcalc.org/genloan.cgi
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Well. We are currently paying our mortgage twice a month. Halving our payment. But we are paying more than the minimum. So it’s hard to argue
I saw the logic- as I said
but I also see real life pitfalls - ones that the guy in the video didn't mention.
I know people who know how to plan well financially. I know few who put it into practice and live it because they either just don't do it, or life gets in the way - a child gets sick, they lose their job, a rock solid marriage falls apart, a devastating accident/injury or unexpected illness ruins long held, well crafted plans and cuts deeply into savings or wipes them out totally.
Folks like Dave Ramsey (and others) have a lot of ignorant people call them for advice. But they also have a lot of very smart people that call for advice not because they had no plan or failed to understand how to make money, but life got in the way and things went sideways fast.
CFP's make a lot of money off of smart people whose finances went sideways, who were convinced they had some inside track, or some great ideas for doing well.
One can take out a 30 year mortgage and use cash to invest to make some money. No doubt about it. If that person is disciplined and has a healthy cash flow, secure job, and a strong emergency fund, that's worth considering. That's not most people.
For others, the security of being able to pay off their home as quickly as possible is peace of mind that the math equations don't much account for in the articles and videos. Plus, the freedom with no payment at all can be quite nice.
I'm at a point in my life and working career where paying off my home is more important than sticking a bit more into some investments.
Oh, I invest. I stick my share of pay into my 401k, and I have multiple IRAs outside of my 401k including ROTHS for investing. But all I really care about now is getting this home payment off my books.
I pay an extra $100 to the principle every month. So i make around 2-2.5 extra payments(base is $416) a year(if you include escrow + the 100 it's around $600 a month i pay.) The mortgage guy said i would knock off 4 years of the remaining 12 i had left. This was about 4 years ago, so i got around 4 left. The latest payoff was around $15,000.If i had to do it all over again, i would have used the tax refund i got back from the last 20 years to put on the house, and it would have been paid off a long time ago.
Y’all are all kind on this topic. It’s mainly a terminology difference, how the mortgage banking industry works and the difference between paying a loan off early versus paying a loan off early and paying less interest.
This applies to conventional fixed rate mortgages where the note specifies a single fixed monthly payment of principal and interest for a set term.
Lets assume 30 year 200k 3% note with a P&I payment of 800 every month for 360 months.
If you make 1 payment of 800 a month for 360 months or 1 payment every day for 360 days in a row, the person who makes 1 payment every day will pay their loan off early but will pay the exact same amount of interest that the person who made 1 payment a month for 30 years. That’s an extreme case but mathematical the answer is the same.
A true biweekly payment plan, which many mortgage companies offer or you can do own your own, on the same fixed rate mortgage will save you both interest and the length of time you are making those $800 payments. On a biweekly payment plan you will $400 every 14 days, 26 payments each calendar year. Assume you start on 12/1/21 and your mortgage payment is due on 1/1/22. You’ll pay 400 on 12/1, 400 on 12/15 and 400 on 12/29. The 12/1 400 will sit unapplied to your loan, the 12/15 400 will be combined with the 12/1 400 applied to the January payment due, and the 12/29 400 will be applied all to the principal balance of the loan. This will remain the schedule and twice a year you will pay 400 to only principal. That 800 of principal only payments will reduce the interest paid over the life of the loan as well as the time it takes to payoff the loan. And it’s about 7 years of you start at the beginning of a 30 year note.
If you only send 400 twice a month, semi-monthly, there is no time savings or internet savings. It’s just a more convenient schedule for some folks. If the contractual payment amount is 800 and you send in 400 those funds aren’t going to be applied to the loan paying interest and reducing principal until the whole 800 is received as that violated the terms of the mortgage and how interest is calculated.
The whole pay half your bill twice a month does work well for daily interest things like credit cards but not fixed rate mortgages due to the way interest is calculated.
You can get almost the same advantage by paying a single monthly payment and adding additional principal of 66.67 (800/12) to each payment. That 66.67 will be applied to the principal balance and reduce the interest paid over the life of the loan and how long you have to make payments.
Although not originated very often these days there are mortgages that specify you will make 26 (biweekly) or 24 (semimonthly) payments but I don’t know anyone who writes those anymore.
There are other tricks for other mortgage products like DSI or Arms but again most folks end up in a fixed rate product these days.
I will run these numbers tomorrow at the office and layout the time and interest savings if anyone is interested. The math is pretty easy to create in excel and you can toy with the additional amounts and figure out what you can actually save.
In this low interest rate environment I don’t think it’s completely a bad idea to invest extra funds in the market instead of applying them to pay off your mortgage sooner but everyone has different goals.
Oh I totally get everything you're saying. And you're absolutely right like I said it takes discipline. Some of those things you said getting in the way as far as emergencies would get in the way of almost any plan including paying off your home early.
But it still boils down to the old bird in the hand two in the bush saying. Most of us had rather have that bird in the hand but it shows a lack of ability to understand the abstract (math as you put it).
I struggle with it myself. Hey the market is scary!
Perhaps it matters where you live to some extent. I’m in a high growth area and buying a house (and selling and buying) has been a great investment. For one, for a family of five, to get a house big enough in a good school district, it is a lot cheaper on a monthly basis to buy than to rent. My mortgage is at least $500 less than any rent in the area.
And even before Covid my house was appreciating at above 10% a year. The Covid shortage made things even crazier - up over 28% in a year and a half.
You have to live somewhere. And instead of spending more to rent, I’ve built up hundreds of thousands in equity in half a decade. And of course there is the cost of home ownership (repairs and maintenance) that will all be factored in to get a bottom line, but overall it’s been 100% better than the alternative.
There are always outliers, and the current market has been remarkable increase in prices. But even in the example you give there is more to it. How much of a down payment and closing costs did you spend on your home?
Say you spent $75,000 in downpayment and closing costs and instead invested that 75k. With a 6% return over 5 years, that would be $422 a month that would nearly cover the $500 difference in rent.
Everything has in a speculative bubble for years. As soon as they start taking the lid off interest rates, things are going to get interesting.
Yeah. I unfortunately had to buy in the height of the market because my wife and I moved to the northeast. The extra $50k we spent was offset by the interest rates so it really didn't make a difference.
But selling our home for $50k less would be unfortunate. Hopefully the prices just level off instead of decreasing.
Maybe, but as a homeowner I can easily find $80 a month in extra costs.
I have to disagree with you; if you didn't buy a home you'd have to rent and rent is often more than an equivalent home, especially after 5 or 10 years after the purchase. Not only do you build equity in the home, you typically have a tax advantage, too.
You have to itemize your deductions for mortgage tax benefits. So a lot of people didn't get to use it anyway. And now that the standard deduction is so high, it benefits even fewer.
I’m pretty good at Texas Hold’em but every now and then a shot glass of arrogance comes along and I lose $100 ish.
If you take out a 30-year mortgage, you certainly won't see the end of the road. I took it for 15 years, and I really don't regret it at all. I still have five years to pay off, but I have increased my income considerably during this time. Through https://www.yhdistalaina.com/45000e-yhdistelylaina/ I found the best deals that banks offer, with the lowest interest. I also took a risk to get a loan to start a beauty business, so I say that my income has increased because I knew how to make money work for me.
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What was your interest rate? I’ve always been of the thought process that you never pay off your house - at least not when rates are low. The cost of money is lower that it’s ever been. My rate is 2.75%, so I’d be better off investing that extra mortgage payment for a higher ROI. Of course I could invest that money later once my house is paid off, but why not start making a return now on your cash flow?
To the other guy who called buying a house a savings account, that is only the case if you are clueless. In this market, you can make good money on an investment. It’s a bit harder on a primary home because you are buying in for a replacement at a higher price. But I bought a second home last year, and a buyer came in (it wasn’t for sale), and offered me 50% more than I paid - all cash. As much as I didn’t want to sell, how could I turn an offer like that down? It’s a sellers market right now, and that probably won’t change for a while.
I took my earnings and bought another home. Had I owned it longer, I could’ve done a 1031 exchange to defer taxes and capital gains hit, but I made so much money on the home it wasn’t a big deal. Now I am renting the property with positive net income while also creating equity in the process. if the market stays strong or even if average appreciation is 2% - 3%, I stand to benefit significantly.
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Congrats, my clients typically have the goal of being debt free. Not always. But most don’t want a mortgage over their heads during retirement
One of the worst things I saw once was a couple in retirement with a mortgage and one of them was in an accident and had to go to an assisted living rehab facility for months and months that sucked up thousands of dollars. Of course this made the mortgage a real big problem.
The stress was unreal and didn't help his recovery at all. In fact, it was a mess.
I saw my parents pay off their mortgage 10 years before they retired and it was such a huge relief for them. They never had too much of an issue paying their payment but just knowing it wasn't there anymore was pure joy for them.
I vowed them I wanted the same thing. I'm not there yet but that's the goal.
That has always been my goal, be debt free, personal and business. I'm sure that it is different for others, but for me, debt is like a cloud that hangs over your head, and that cloud is there until it's not. My thought has always been if I have no mortgage(s), I can scrape around and pay for insurance, electricity, and food when times get lean/hard. I don't need toys/extras to be happy (some folks call these things essentials).
This is always a good coversation but the 30 yr. mortgage is the way to go.
You can always pay extra principal whenever you want but you are not locked into a higher mo. payment.
Your mortgage rate is fixed.
You will be paying back cheaper dollars in the later years because of inflation.
This is a no brainer!!!!!!!!
You can always pay extra principal whenever you want but you are not locked into a higher mo. payment.
Your mortgage rate is fixed.
You will be paying back cheaper dollars in the later years because of inflation.
This is a no brainer!!!!!!!!
I think the key is understanding the goals of the client is the most important thing. For example, I am 43 years old and living in a house that I am paying at 2.75% on a fixed 30 year loan. It will not be my retirement home. I see the opportunity to invest my money elsewhere rather than aggressively paying off my loan. Someone who is closer to retirement and intending to stay in that home will have different goals. To each his own for sure…
Exactly. The monetary environment of high yearly inflation/QE and low interest rates makes it the perfect time for max leverage if you have plan. It's one of the reasons central banks and top investment firms are all over residential real estate right now.
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Yes, he knows what he is talking about! There are different methods of getting better conditions for mortgage loans. For example, when I was getting the mortgage loan for my house, I used the services of a Mortgage Advisor in Derby. He explained everything about getting a mortgage in my region and explained why I have some advantages as a first-time buyer. His services weren't cheap, but it didn't bother me because, with his help, I could get a better mortgage contract, and I saved lots of money on it.
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