Mortgage experts, bi-weekly payments.

[kevinbahnz]

deleted.

[gatorfast]

Contact your mortgage servicer and they will tell you what to do and set it up for you.

But it should be your current payment divided by two and paid every two weeks.

[Mr Tonka]

Originally Posted by gatorfast

Contact your mortgage servicer and they will tell you what to do and set it up for you.

But it should be your current payment divided by two and paid every two weeks.

This.

The premise is that your interest accrues day by day at the beginning of each month or the day after your payment was received. Since that interest is calculated on the principle balance due making payments more frequently reduces the amount of time interest can accrue which results in you paying less interest and more principle.

On a 30 year $300k loan at 4.5% you will save about $45k in interest making bimonthly payments over a single monthly payment.

Also, if you make 1 additional mortgage payment a year you'll save about the same amount in interest as bimonthly payments.

[upstatedoc]

Originally Posted by Mr Tonka

This.

The premise is that your interest accrues day by day at the beginning of each month or the day after your payment was received. Since that interest is calculated on the principle balance due making payments more frequently reduces the amount of time interest can accrue which results in you paying less interest and more principle.

On a 30 year $300k loan at 4.5% you will save about $45k in interest making bi- monthly payments over a single monthly payment.

fixed that.

And we knocked off 7 years of payments refinancing and going bi...

[kevinbahnz]

Originally Posted by Mr Tonka

This.

The premise is that your interest accrues day by day at the beginning of each month or the day after your payment was received. Since that interest is calculated on the principle balance due making payments more frequently reduces the amount of time interest can accrue which results in you paying less interest and more principle.

On a 30 year $300k loan at 4.5% you will save about $45k in interest making by monthly payments over a single monthly payment.

Also, if you make 1 additional mortgage payment a year you'll save about the same amount in interest as by monthly payments.

thank you.

[Mr Tonka]

Originally Posted by upstatedoc

fixed that.

And we knocked off 7 years of payments refinancing and going bi...

oops... Thanks.

You and your wife went bi?

[will.c]

Originally Posted by Mr Tonka

This.

The premise is that your interest accrues day by day at the beginning of each month or the day after your payment was received. Since that interest is calculated on the principle balance due making payments more frequently reduces the amount of time interest can accrue which results in you paying less interest and more principle.

On a 30 year $300k loan at 4.5% you will save about $45k in interest making by monthly payments over a single monthly payment.

Also, if you make 1 additional mortgage payment a year you'll save about the same amount in interest as by monthly payments.

Can these be applied to car payments as well? Do you mind quickly running some numbers with an example $30k finance for 60 months at 4%?

45/300 sounds pleasantly substantial; I mean, that's free $1.5K/yr in asset which you can apply to an additional payment for each year. And this will give him another savings of.... wait...

Bi-weekly = 26 payments of 1/2 of monthly payments, so that's 26 x 1/2 = 13 as opposed to your normal 12. So you are actually paying 1 additional monthly payment out of your pocket per year. So if you're getting the same $45k savings from (a) simply making 1 additional payment, and (b) going bi-weekly which is effectively making 1 more payment, there seems no interest savings from paying more often. Am I getting this right?

That said, how about making exactly 2 payments per month? I don't know if banks commonly allow this type of schedule, but what kind of interest savings will this generate?

EDIT:
Oops, I must have read your post wrong. Confused biweekly and bimonthly. Well, the dictionary says bi-something is either twice in that period or once every two periods, not to mention my ignorance on this subject.

So I'm still curious about my original question.

[Titanium3er]

Originally Posted by will.c

Can these be applied to car payments as well?

The technique applies to auto loans as well, but your savings will be negligible unless your interest rate or principal is unusually high.

Edit: Ran the numbers and although I can't post results properly from my phone essentially you would pay the loan off 5 months sooner, but would only save $270.

[upstatedoc]

Originally Posted by Mr Tonka

You and your wife went bi?

sorry, no pics...

[Mr Tonka]

Originally Posted by Titanium3er

The technique applies to auto loans as well, but your savings will be negligible unless your interest rate or principal is unusually high.

Edit: Ran the numbers and although I can't post results properly from my phone essentially you would pay the loan off 5 months sooner, but would only save $270.

True. Interest rates are typically pretty low and coupled with the short term, there isn't much to save.

Consider that on a $50k 60 month car loan you may only pay $5000 to $7000 in interest over that term. With a $300k 360 month home loan you're paying any where from $245k to $300k in interest over that term.

[RandomHero]

I believe Mr. Tonka is an Advisor as well. I'll offer a slightly different perspective in order to supplement what he said (all of which I agree with).

Taking the Dave Ramsey approach of paying off debt as quick as possible is certainly wise for some people. However, it may not necessarily be the best approach in a perfect world if you have financial discipline.

-On a $300k mortgage with a 30 year 4.5% interest rate you’ll pay about $247k in total interest. However, that’s assuming you keep the mortgage for the entire 30 year period and don’t sell it before then.

-If you pay Bi-Weekly you’ll end saving yourself $40,859 in interest over the 30 year period. That sounds pretty good right?

However, consider a few things:
-You’re paying an extra $1520.06 a year when paying bi-monthly. Would you rather have that money now and possibly invest it?

-You’re effectively lowering your interest rate to 3.85% from 4.50% over 30 years but you have to pay it off 4.3 years faster. Is that significant to you?

-$40,859 in savings sounds pretty good after 30 years, but factoring in 2.5%/year inflation, that’s less than $20k in today’s dollars.
-If you invested that $1500/year instead, you’d only need to see about a 4.12%/year return over 30 years to break even.
Conclusion:
It’s great that you’re thinking long term, but you need to decide for yourself if it makes sense to pay bi-monthly. Sure, you’re saving yourself money in interest, but rates are so low right now you’re not really saving yourself much money when you break the numbers down.

[BayMoWe335]

If you have the cash, paying it off early in a lump might not be a bad idea. Investing is tough now unless you believe there's a lot of upside left in the market.

[puffer]

Originally Posted by RandomHero

However, consider a few things:
-You’re paying an extra $1520.06 a year when paying bi-monthly. Would you rather have that money now and possibly invest it?

Can you clarify this statement? I thought monthly, you pay 2 half payments, so in the end it's the same. How do you pay more with the same payments?

[RandomHero]

Originally Posted by puffer

Can you clarify this statement? I thought monthly, you pay 2 half payments, so in the end it's the same. How do you pay more with the same payments?

Excuse me: it should have read biweekly not bimonthly. There's almost no value in making bimonthly payments.

The mortgage payment on a $300k 30 year 4.5% rate mortage is $1520.06 a month.


Biweekly payments means you're making 26 payments a year. Presumably at $760.03/payment (half your monthly payment).

With a 52 week year you're making 26 half payments. That comes out to 13 monthly payments.

[Mr Tonka]

Originally Posted by Mr Tonka

This.

The premise is that your interest accrues day by day at the beginning of each month or the day after your payment was received. Since that interest is calculated on the principle balance due making payments more frequently reduces the amount of time interest can accrue which results in you paying less interest and more principle.

On a 30 year $300k loan at 4.5% you will save about $45k in interest making bimonthly payments over a single monthly payment.

Also, if you make 1 additional mortgage payment a year you'll save about the same amount in interest as bimonthly payments.

Originally Posted by puffer

Can you clarify this statement? I thought monthly, you pay 2 half payments, so in the end it's the same. How do you pay more with the same payments?

Now you know why just making a 13th payment reduces your paid interest the same amount.

You can check out an online mortgage calculator and pop in some variables to see the differences.

I'm not an advisor. I just wanted to find out the best way to save as much as we could and pay off the debt as quickly as possible on our first home. After looking at it from all directions we ultimately made 3 mortgage payments a month. We paid our normal payment (principle and interest) and made an additional payment in the middle of the month that was twice as much as the mortgage towards principle. Started doing that in the 3rd year of the loan and paid it off in 10 years.

As RandomHero said, that's not always the best thing to do. Our goal was to get that property paid off and producing revenue via a tenant. At the same time, get a credit line using that property as collateral and use the credit line for down payments on new rentals.

[puffer]

Got it. I kept thinking this set up was paying half the monthly mortgage on the 1st, then then the other half on the 15th, but bi-weekely means every two weeks, duh.

[RandomHero]

Originally Posted by puffer

Got it. I kept thinking this set up was paying half the monthly mortgage on the 1st, then then the other half on the 15th, but bi-weekely means every two weeks, duh.

That's partially my fault and I apologize. Paying bimonthly (two times a month) might save you $1000 or so over 30 years and that's only if your mortgage principal adjusts more frequently than every month. It's not worth the trouble if you ask me.

To make it easy:
$1000 monthly payment (12 a year)- no savings
$500 bimonthly payment (24 a year)- might save you $1000 over 30 years if you're lucky
$500 biweekly payment (26 a year)- saves you tens of thousands of dollars, but the tradeoff is that you could be investing that extra money.

[ddk632]

^^

Bi-monthly would be once every two months
Semi-monthly is twice per month

Just to clarify.

[Mr Tonka]

Originally Posted by RandomHero

That's partially my fault and I apologize. Paying bimonthly (two times a month) might save you $1000 or so over 30 years and that's only if your mortgage principal adjusts more frequently than every month. It's not worth the trouble if you ask me.

To make it easy:
$1000 monthly payment (12 a year)- no savings
$500 bimonthly payment (24 a year)- might save you $1000 over 30 years if you're lucky
$500 biweekly payment (26 a year)- saves you tens of thousands of dollars, but the tradeoff is that you could be investing that extra money.

No, my apologies for starting the bimonthly terminology.

[upstatedoc]

Apparently, according to the dictionary, bi-weekly and bi-monthly can both mean twice a month.

[gatorfast]

Originally Posted by upstatedoc

Apparently, according to the dictionary, bi-weekly and bi-monthly can both mean twice a month.

Bi-weekly is every two weeks (26payments per year). Bi-monthly or semimonthly is twice a month (24 payments per year).

[Titanium3er]

Originally Posted by gatorfast

Bi-weekly is every two weeks (26payments per year). Bi-monthly or semimonthly is twice a month (24 payments per year).

You are both mistaken. I know because I had this discussion with a friend recently.

I prefer using bi-weekly to refer to once every two weeks and bi-monthly for once every two months, but the former can also mean twice per week and the latter twice per month.