Easy way to shave 4 years off house payment
We are now officially in the peak spring home buying season. I was asked the other day for advice on what should be at the top of the list for homeowners after they move into their new home.
That was an easy question to answer. My No. 1 piece of advice for recent homebuyers is to switch from the traditional monthly mortgage payments to either weekly or bi-weekly payments.
Why? Because it's the least painful, simplest way I know to shave approximately four years off the life of a traditional 30-year fixed rate mortgage. Here's what you need to do.
First, contact your mortgage lender to set up automatic withdrawals from your bank account for your mortgage payments. While you could theoretically achieve the same result by mailing in your payments, the vast majority of people won't have the discipline to stick to this alternate payment schedule if it's not set up as an automatic withdrawal.
Next, ask your lender to establish a payment every two weeks. Take your monthly mortgage payment and divide it by two to come up with your payment amount. For example, if your mortgage payment is $1,000 a month, your payment should be $500 every two weeks. You could also establish weekly payments instead, which would be $250 a week instead of a $1,000 monthly payment.
This simple change in your payment schedule will cut approximately four years off of a traditional 30-year fixed rate mortgage. Check with your mortgage lender for an exact calculation of the reduction in years based on your individual circumstances.
Sounds painless and too good to be true, doesn't it? Here's how it works. If you make payments every two weeks, you're making 26 payments a year. Since each payment is half of your normal monthly payment, take the 26 payments and divide by two to arrive at the monthly payments you are making each year. Twenty-six divided by two results in 13 monthly payments that you've made each year instead of the 12 monthly payments that you would normally make under a traditional payment schedule.
So, you end up paying an extra monthly payment on your mortgage each year, which has an impact on the compounding effect of the interest on your mortgage. Most homeowners would be hard-pressed to come up with an additional mortgage payment at the end of each year, so this is a great way to accomplish some forced savings in a manner that most people don't even feel.
And this is not just for new homebuyers. Many existing homeowners are asking themselves, “Should I refinance?” If you decide to refinance your mortgage to today's low interest rates, make sure to consider this option when you set up your new mortgage.
Finally, consider this scenario: You might have a child in college during those last four years of your mortgage. The absence of your mortgage payments might be the solution to paying tuition for those four years of college.
Tom Reddin, former president of LendingTree, writes for the Charlotte Observer about mortgages and home ownership.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Stock market closes 2nd best week of 2014
- Pennsylvania jobless rate drops to 5.1 percent
- First Niagara to cut 200 jobs; Pittsburgh impact unclear
- 8 Western Pennsylvania hospitals penalized over infections
- Nonprofit hospitals in Western Pa. feel pain in finances despite Affordable Care Act
- Beacons track shoppers’ smartphones amid retailers’ aisles
- Western Pa. utility workers OK contract with FirstEnergy
- Hospital finances still crying ‘ouch’
- Ford expands air bag recall across U.S.
- Online price battle heats up with intraday price fluctuations
- Stock market caps lousiest week since 2012