The debate whether making a twice-monthly mortgage payment saves money is making the rounds on some popular blogs right now. The idea is paying your mortgage every two weeks rather than every month in order to save money. Whether this trick works depends on several things, but the most important part is that you shouldn’t pay a penny extra for this service. You should also consider twice-monthly mortgage payment alternatives.
So generally that means any time you get an offer in the mail for something like this, you should tear it up. Deal directly with your lender.
The savings comes from two things. One, if your interest is compounded often enough, paying twice a month actually decreases the amount of interest you’re paying, ever so slightly. They taught me the math back in College Algebra way back in 1993, but that was a long time ago. I’m actually surprised that I remember ever knowing how to do the math.
But the bigger savings comes from sneaking in an extra payment every year. You see, by paying every two weeks, you make 26 half payments, instead of 12 full payments.
You can accomplish essentially the same thing by mailing in a little extra (1/12 of a payment, rounded up to the next dollar, to be precise) every month. If your mortgage payment is $1,000, send in $1,084. You save essentially the same amount of money and still only have to remember to pay once a month.
And if you’re thinking about refinancing from 30 years to 15, consider this instead. Use a mortgage calculator to figure out your new payment, and just start sending in that payment. You don’t lower your interest rate, but you save closing costs, which can be significant. And you save by not starting over again at zero on your principle balance.
A good mortgage payoff calculator (there are numerous good ones that you can find by searching Google) will let you weigh the two options and make a good decision. The better option will vary based on interest rates, closing costs, and how long you’ve been making payments on your current mortgage.
You can try to negotiate a re-fi with no closing costs. But some loan officers won’t budge on that. Others will do sneaky things to the terms to get that money out of you some other way. So beware.
A final, very unconventional option, if you have half your balance paid off, is to take out a home equity line of credit. Then use the HELOC to pay off your mortgage. This is only beneficial if your interest rate is lower and you plan on paying the house off in five years or less. Interest rates will almost assuredly be higher when the HELOC resets at the end of its current term. But the upside to a HELOC is that you don’t have any closing costs. So it could be a way for you to lower your interest rate for free.
So the answer is, yes, twice-monthly mortgage payments save money. But so do other tricks, and you can combine them to save even more.
My credit union actually offered us a lower percentage
rate (half a point off, I believe) on our last car loan if we
agreed to (A) do bi-weekly payments vs. monthly, and
(B) agreed to have them automatically deducted from
our account. It’s a lot easier to manage and we save
money to boot!
That’s another good point. Credit unions tend to be much more accommodating of things like this, and sometimes offer perks if you do.
If a credit union is open to you, by all means go with them. If not, go for a local or regional bank. Only use large, soulless banks that are listed on the NYSE as a last resort.