Mortgage question

You know those TV's they have in gas pumps now? I was pumping gas and a lady on the tv says that if instead of paying your whole mortgage payment on the first of the month you pay half on the first and half on the 15th it will save money in interest and could take years off your mortgage. I dont see how that could be true, but I thought it would be worth asking you guys, I know we have some people that are pretty smart about this stuff. So is that true?

It's the idea of paying on the principle quickly. 

In that example above you send money in before its due. That half payment puts some money toward your principle quicker and then you pay the rest later. 

So, in that example above, the payment on the 1st of the month is an early payment and the payment on the 15th is the rest of the money on the real due date. 

This is all similar to the idea that if you send in an extra $100 with every house payment with that extra $100 going to the principal, you will pay the house off much quicker. 

That doesn't make much sense that it would really change the balance significantly. There would be a small difference with the reduction of interest but is it enough to really make a difference?

If you are talking a bit weekly then yeah I have done that before and it works because you are making an extra payment. With the 1st and 15th you are still just making 12 full payments a year. 

It works if your mortgage is setup to allow it.   

It's does work. It may not be super effective depending on specific details of your mortgage. 

If you can afford to pay any extra and apply it directly to principle, then you could pay the extra principle mid month, and follow up with the regular, full payment at the end of the month. That will give you the benefit of both paying extra principle and having more frequent payments.

Most, if not all mortgages in the US only caculate interest monthly, not daily like a credit card. For that reason, just making two half payments doesn't do much other than potentially getting you a nastygram about not making full payments from your servicer. Don't ask me how I know that.

The early payments approach works on credit cards because those calculate interest daily.

The usual way this works for mortgages is that an intermediary - which may be the servicer - gets you to send over a half payment every two weeks and not on the 1st and 15th. Over the course of the year that means you're effectively saving up a 13th monthly mortgage payment, which said intermediary or servicer then applies to the principal for you. For a "small" fee, of course, and you hope that they actually don't forget to make the payment or are late with any of the other payments.

So if you get paid every two weeks, you can do this yourself and just sock away 1/2 a mortgage payment every time and then send over a 13th payment at the end of the year. Same effect, just hopefully without the extra fees.

Just tacking on extra every month, which doubles the amount going to principle, should cut 3 years off of my mortgage according to most of the tables I checked. 

If you could send more than half if you paid twice a month instead of once, I'd say go for it, otherwise, I think it's just doubling your chances of missing a payment or something going wrong.

Could it be that she was offering bi weekly payments?  That's been a thing in the Great White North for a long time.  26 half payments a year means 13 months of payments per year. 

I've never gotten a biweekly paycheque , so it doesn't work for me.  I do overpay monthly, and can apply the extra in the account directly to principal once a year.

As others have said, it's paying every two weeks vs once per month which equals an extra payment every year.

Depending on interest, if you did that from the beginning of a mortgage, you'll knock 5-7 years off a 30 year mortgage.

They were talking about a biweekly payment schedule not one on the half on the first and half on the 15th.  The main benefit comes from making 13 payments a year.

Paying one extra payment a year will drop your 30 year mortgage to 21 years and a few months normally.

Can I suggest making a spreadsheet where you can run the numbers?  And keep it, too- then you can make adjustments to your model as your situation changes.  And before you make any changes to who has your mortgage, know how they calculate the interest- monthly (with the normal payment cycle) or bi-monthly (with the new model).  When you set up the payment model- you can run each method, and see how it effects things.

One thing that is interesting - shorter mortgates have lower rates, too.  

Anyway, make a model, run the numbers on your own.

alfadriver (Forum Supporter) said:

Can I suggest making a spreadsheet where you can run the numbers?  And keep it, too- then you can make adjustments to your model as your situation changes.  And before you make any changes to who has your mortgage, know how they calculate the interest- monthly (with the normal payment cycle) or bi-monthly (with the new model).  When you set up the payment model- you can run each method, and see how it effects things.

One thing that is interesting - shorter mortgates have lower rates, too.  

Anyway, make a model, run the numbers on your own.

What Alfadriver said.

I use a spreadsheet to work out the carried interest for the proceeding month to the penny and send in some odd amount (I made my September payment last week and sent in $2,138.96) so my principle would be reduced by exactly $2,000.  Why? because math guy and it's satisfying to have a round principle balance.

So many things in life are beyond our control but math isn't one of them; own it! 

In reply to RX Reven' :

I set my prices at work on our products so my commission is an even number - like $500 or $1,000.

Most times I price products to reflect a Chevrolet engine or an old Datsun product.   

$3.27 each.  $4.09 each.  $4.27 each

$510.00.   $240.00 

In reply to Datsun310Guy :

OMG, I do the same thing but with universally significant numbers.

1.618 (Golden Ratio) 23.45 (Earth's tilt) 1123 (Fibonacci sequence), 6.626 (Planck's constant), etc.

It's my subtle way of saying RX Reven' was here.

In reply to RX Reven' :

this is amazing.  

An explanation of how it works: https://www.investopedia.com/terms/b/bimonthlypayments.asp

If your mortgage allows you to apply additional money directly to principle, paying extra will shorten the term of the mortgage.

However, the smart thing really depends on if your mortgage rate is greater or less than the performance of other long term investments. If you can put money in a retirement account and get 4.5% returns, and your mortgage is at 3.5%, you're better off putting that extra money in the retirement account.

I'll play devil's advocate. With mortgage rates at historic lows, is this strategy even worth it? There are a lotta folks with sub 3% mortgage rates. 

It would be a better use of the money to throw it in a Vanguard low-cost mutual fund. Nearly all of them have historic returns much higher than 3%

RX Reven' said:

alfadriver (Forum Supporter) said:

Can I suggest making a spreadsheet where you can run the numbers? 

What Alfadriver said.

This.  Always do the math.  Rampant speculation with no attention to detail gets you nowhere.

calteg said:

I'll play devil's advocate. With mortgage rates at historic lows, is this strategy even worth it? There are a lotta folks with sub 3% mortgage rates. 

It would be a better use of the money to throw it in a Vanguard low-cost mutual fund. Nearly all of them have historic returns much higher than 3%

This. My mortgage is 2.875%. I'm not really in a rush to pay it off.

I was doing this when I first bought my house.  They applied my payment the day it was received, so it was in effect reducing the interest charged each month.  Unfortunately, they switched servicing companies and changed their processes so payments were only applied on the day they are due (regardless of when received), negating any savings from using this approach.

slefain said:

calteg said:

I'll play devil's advocate. With mortgage rates at historic lows, is this strategy even worth it? There are a lotta folks with sub 3% mortgage rates. 

It would be a better use of the money to throw it in a Vanguard low-cost mutual fund. Nearly all of them have historic returns much higher than 3%

This. My mortgage is 2.875%. I'm not really in a rush to pay it off.

Same here, similar rate thanks to a recent refi into a 20 year mortgage. Although I've seen offers for 1.x% for 15 year mortgages recently.

I'm currently overpaying, but only by rounding up the payment to the next 100, which results in something like thirty bucks overpayment or so.

Right now, I think if you have good credit and a loan that has a rate above 3% for a primary residence, you do better by looking at a refi if you're planning to stay the house for a while compared to overpaying the mortgage.