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More a question of optimal strategy and effect on the principal balance.
Strategy 1: Make half of the monthly payment every 2 weeks. 0.5 monthly payment * 26 weeks = 13 payments in 12 months
Strategy 2: Make 12 monthly payments, but pay 8.3% more than payment amount. 12 * 1.08333 = 13 payments in 12 months
I am doing Strategy 2, but people seem to prefer strategy 1. I can't tell if it is because smaller, more frequent payments are easier to budget, or strategy 1 actually reduced principal more quickly.
I can't seem to get a direct answer with mortgage/amortization calculators, as to which strategy is better for quicker principle reduction. Are they the same?
Thanks...
Reason why people prefer strategy number one is because it messes up the interest on the payment. Most places do a daily compounded interest rate against the principal. Truthfully you save money with strategy 1. I had too many economics classes.... I did strategy 1, and I will have my auto loan paid off 8 months before the 60 month period.
The difference between the two strategies comes down to the way the borrower receives their income what they are most likely to continue with long term.
If the borrower is paid bi-weekly it is easier for them to make the mortgage payment 1/2 every two weeks.
If the borrower is paid any other way (weekly or monthly) it is probably easier to pay the payment as you are doing now: monthly payment plus the added amount added to principal.
Or, I use to just add a full month of principal in addition to my normal payment at the beginning of each year. The system that works best is the one you use regularly.
@jadeite788 wrote:Reason why people prefer strategy number one is because it messes up the interest on the payment. Most places do a daily compounded interest rate against the principal. Truthfully you save money with strategy 1. I had too many economics classes.... I did strategy 1, and I will have my auto loan paid off 8 months before the 60 month period.
Thanks for the info. The every two weeks is a little odd, timing wise. Pay dates are usually on the 1st and 15th of every month, but paying every 2 weeks means that large payments would eventually occur on the 10th, 25th, etc.
Similar question. If I were to pay 54% of my monthly obligation twice a month (on the 1st and the 15th), would this achieve a similar function as strategy #1? (i.e., screwing up the interest calculation?). It would still be 13 payments in 12 months, paid twice a month, just not every two weeks.
Thanks.
@StartingOver10 wrote:The system that works best is the one you use regularly.
Well, that's true, but only half of the story. For example, it's no skin off my back whether I pay 108% once a month, or 54% twice a month. It's all the same to me, and I would do either one regularly. However, if one strategy actually works to decrease principal faster than the other, that is obviously the optimal direction, and the system that "works best".
If you are paid every other week, twice a year you get a month with 3 paychecks. Just use that extra check twice a year lol.
no problem, I took an engineering economics course while in college, and the professor explained how things are in everyday life, house, car, etc. Once explain I knew I was getting ripped off. From the scenario you gave it still sounds like every 2 weeks (14 days). But still it deals with interest, but you would be paying against also the principal. So now time is a factor as well. With that the only issue you might run into is from what I have heard is prepayment penalty or early payoff penalties. Thats the other way a lender might get you at so they are not losing out too much. Not everyone does that though. That is something to take into consideration when looking for a mortgage lender. This was a question that I had asked with my LO already.