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mortgage - pay 2X a month offer to save interest?

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DallasLoanGuy
Super Contributor

Re: mortgage - pay 2X a month offer to save interest?



@Anonymous wrote:

@Lel wrote:
If the payment plan offered is really twice a month, rather than every two weeks, then I can't see how this will lead to any additional interest savings.



It depends on how the interest is calculated. If they take the mid month payment and apply it immediately, then the principle is reduced for the next half month payment. So, you save a relatively small amount of interest (basically half a month's interest on the principle paid by the previous half-months payment). This can still lead to a significant savings in interest and reduction in term over the life of the loan.

From the mortgage calculator here:
http://www.homefair.com/tools/mortgage-payment-calculator/index.asp

For a $100k 30 year fixed loan at 7%, you save a little less than $33k in interest and pay off the loan almost 6 years early! Behold the power of compound interest!


i dont think they apply it.
and the savings isnt from paying early.... the interest savings is from making 26 half payments which = 13 payments per yr
 
Retired Lender
Message 11 of 20
Anonymous
Not applicable

Re: mortgage - pay 2X a month offer to save interest?


@DallasLoanGuy wrote:
i dont think they apply it.
and the savings isnt from paying early.... the interest savings is from making 26 half payments which = 13 payments per yr




From my understanding (recognizing that as an LO, your's is probably superior!), it depends on the program, but it seems that the majority don't actually credit payments immediately, and even if they did, you're right that the vast majority of the savings would come from the extra payment money anyway. As I noted in a follow-up post, paying twice a month with no "extra" money saves about 1 monthly payment's worth of interest if they calculate interest twice a month based upon immediate application of the payment. Pretty paltry compared to the 6-7 years of payments saved by increasing your payment amount by (13/12) annually, even without "immediate application" of the payment.
Message 12 of 20
DallasLoanGuy
Super Contributor

Re: mortgage - pay 2X a month offer to save interest?



@Anonymous wrote:

@DallasLoanGuy wrote:
i dont think they apply it.
and the savings isnt from paying early.... the interest savings is from making 26 half payments which = 13 payments per yr




From my understanding (recognizing that as an LO, your's is probably superior!), it depends on the program, but it seems that the majority don't actually credit payments immediately, and even if they did, you're right that the vast majority of the savings would come from the extra payment money anyway. As I noted in a follow-up post, paying twice a month with no "extra" money saves about 1 monthly payment's worth of interest if they calculate interest twice a month based upon immediate application of the payment. Pretty paltry compared to the 6-7 years of payments saved by increasing your payment amount by (13/12) annually, even without "immediate application" of the payment.


pull up a mortgage calculator and put in one extra pmt per yr. it knocks off something like 6.8 yrs or something.
the reason that the 'early' payment doesnt help, is that they typically hold the first payment in escrow until they get the second.... i have been told.
 
 
 
 
Retired Lender
Message 13 of 20
Anonymous
Not applicable

Re: mortgage - pay 2X a month offer to save interest?

So will it be a good idea to get these program or no? i am closing next week if everything turns out fine and i am seeing if it will be a good idea to register into these program does it pay off? is it wouth it? would you recomend it?
Message 14 of 20
DallasLoanGuy
Super Contributor

Re: mortgage - pay 2X a month offer to save interest?



Arturoch wrote:
So will it be a good idea to get these program or no? i am closing next week if everything turns out fine and i am seeing if it will be a good idea to register into these program does it pay off? is it wouth it? would you recomend it?



personal decision really....
it FORCES you to make that extra payment.
 
and while we tout the advantage of paying off a 30yr loan in 23..... how many people stay beyond 5 - 10 anymore?!?!? LOL
 
bottom line: good deal for some. not for everyone. remember!!! twice a year you will have a month with 3 half payments.... if you can budget that, you are there.
 
 
Retired Lender
Message 15 of 20
Lel
Moderator Emeritus

Re: mortgage - pay 2X a month offer to save interest?



@DallasLoanGuy wrote:


@Anonymous wrote:
Thanks everyone - I think I will steer clear of this. Thanks!



it is what it is.... and it WORKS.....!!!
knocks 7yrs off the end of the note.... if you can budget it.
you are only making one extra pmt per month... in a way that you should be able to stick to.
do not discount it.





I don't think anyone here was disputing the fact that you definitely save money by making the equivalent of an extra payment every year. I think the issue is that some of us (me included) don't think it is necessary to enroll in a biweekly payment plan to reap this benefit (especially if WaMu is going to charge extra for the privilege). If a person has the self-discipline to save for that extra payment - or increase the monthly payment - then he/she can knock 7 years off the loan without having to formally change his/her payment plan.
Message 16 of 20
DallasLoanGuy
Super Contributor

Re: mortgage - pay 2X a month offer to save interest?

very true Lel
 
but some lack the discipline...
Retired Lender
Message 17 of 20
Anonymous
Not applicable

Re: mortgage - pay 2X a month offer to save interest?

Easy way to discipline yourself.
 
Make transfers between your savings and checking.  Transfer the amount you would pay (had you enrolled in the program) into your savings or a short term CD.  You can calculate the months where the extra payment would come into play if you wanted to or you could make a standard re-occurring transfer of 1/12th the amount every month.
 
This way you are forced (kind of) to budget accordingly, you earn interest on your investment, then at the end of the year use the money to pay down your principle.  This is better than the program they are offering you.
Message 18 of 20
Anonymous
Not applicable

Re: mortgage - pay 2X a month offer to save interest?

You are moderately better off paying 1/12th extra every month rather than saving up a whole extra payment and paying it at the end of the year. The interest you earn in your high yield money market or CD account will probably be half (or less) of the interest saved by paying down the mortgage that little bit extra each month (and it will be taxable gain/income).

Again, no program is required if you have the proper self discipline.

If the issue is only having the "extra" payment in a month 2 times a year (i.e. if you get paid every 2 weeks, those 2 months per year that you get an "extra" paycheck), you still get more benefit paying the extra toward the mortgage at that time rather than "saving it" for one extra payment at the end of the year.

Then again, if you're like me, you may have a couple of "lump sum" payments that happen once or twice a year that you want to schedule for the months with the "extra" paycheck (for me, it's my car insurance, registration, maintenance, and similar such expenses), so there isn't really much "extra" income in those months.

Basically, though, my point is that if you want to pay extra toward your mortgage, you get the best "bang for your buck" by paying down the mortgage in the month that you have extra money to do so, rather than waiting until the end of the year.
Message 19 of 20
DallasLoanGuy
Super Contributor

Re: mortgage - pay 2X a month offer to save interest?

One way would to use your Christmas bonus or tax return to make that 13th payment.
 
Retired Lender
Message 20 of 20
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