Have a mortgage? Save $71,000 in interest payments

66 Comments

19 22 0

I’ve been hammering on the idea of focusing on the big wins instead of worrying about $3 lattes here and there. It’s far better to focus on cutting 25% off the two biggest areas of your spending than to worry about saving 5% on 50 things.

Any time you make a major purchase, there is a huge amount of money to optimize. And buying a house is the best example of this.

Even though buying a house is usually not a good investment, once you have a mortgage, you can optimize the hell out of it.

Today, Andy Jolls from videocreditscore.com is going to show you one way to save $71,000+ on your mortgage.

Dominate Your 30 Year Mortgage in 25 Years


Can’t see the video? Click here

01:16 — Typical Mortgage Payments
01:36 — Extra Payments
02:07 — $71,000 Savings
02:23 — What if your credit is worse?
03:29Scrooge Strategy members can learn more

Today let’s see some real world examples of how you can save money on your biggest-ticket item: housing.

Instead of paying off your mortgage once per month, set up a system to pay it twice per month. I’m not telling you to double your payments. I’m saying that paying every two weeks WILL mean several years less of payments.

Here’s how it works with Bank of America [Countrywide] and I’ll assuming it works this way with others. BofA has a plan (PayPlan/26) which means instead of making 12 payments a year you are paying 26 payments a year. Note the math. It seems like you should be paying 24 payments a year, but that’s not how the calendar works, so you make extra payments. But, that’s a good thing. It’s like you are making 13 payments a year [the way BofA does it, more on this below*] Let’s take a look.

Scenario 1: Typical Mortgage

APR: 6%, $300K, 12 monthly payments of $1798.65, total interest paid over 30 years, $347,514.57

Scenario 2: Making an extra payment each year

APR: 6%, $300K,? 26 bi-weekly payments of $899.38, total interest paid over 25 years, $276,591

You just saved almost $71,000 in interest payments. Wow, that’s like 18,000 lattes or one every day for the next 50 years.

What’s happens if you have bad credit and have higher interest rates than 6%. Moving to every two weeks helps even more. At a 7% interest rate, you will shorten your loan by 6 years instead of 5 years for the 6% rate. Better yet, you save from paying $98,545 in interest.

Scenario 3: Making extra payments each month

Okay, this doesn’t save you a lot more, but you stop payments 5 months sooner and your interest payout is $273,852 for an extra savings of $2739.

The problem with the scenarios above is unless they are automated, most of us will never do it. That’s why the BofA PayPlan/26 plan is great. It’s automatic.

Here’s what sucks about the plan. One, they charge a $4 fee every month. Okay that’s $2600 over the course of the loan. But, the bigger issue is this. They don’t apply your mid month payment right way, rather, they hold your money like a bank and then make a payment with your two payments at the end of the month. Thus, the plan really is a 13 payment plan. This is pretty downright snaky in my book and I think [hope] the regulators jump on this. According the scenarios above I should be saving another $2739, but I’m not.

I’ve seen many posts that complain about the fact that the banks charge for this service in many different ways. I agree with these complaints, but I want to point out that I disagree with the advice most posters give. They say, get a bunch of envelopes and be disciplined about this. I just don’t think “discipline” is realistic for most busy people. (Note from Ramit: See Personal finance is not about more willpower.) Sure, I’m bummed about paying $2600 for something I should be able to remember to do, but that $2600 is saving me $71,000. So, it’s a tradeoff I willingly accept.

But all this said, the upside totally outweighs the downside. It’s an automatic way to save you more money than you could save almost anywhere else and you’ll be paid off 5 years earlier.

###
Andy is an ex-FICO executive and Chief Educator at VideoCreditScore.com. Check out these videos:

* * *

See the specifics: If you liked this, Andy recorded a more in-depth premium video for Scrooge Strategy members, which shows specific tactics, phone numbers, and an additional tip for saving $117,600 on the lifetime of a typical mortgage. Sample screenshot:

picture-5

My Scrooge Strategy members get proven, specific tips like this every week — and if the tips aren’t useful for you, you get 100% of your money back. See how to focus on the big wins and save thousands — no risk.

19 22 0

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66 Comments

19 22 0
 
  1. This advice is sooooo old that it probably grew a beard already! Dave Bach wrote and teached it light years ago! Isn’t there any fresh way to take and effectively pay a mortgage?

  2. Although I agree with Pawel about this advice being old news, I think the information about which lenders allow biweekly payments is interesting.

    I searched long and hard for a bank that would actually process a biweekly payment plan, and could not find one. They seem to ALL hold the money until the end of the month. Instead, I automate 1/12th of my mortgage bill each month into a savings account and pay an extra payment at the end of the year.

  3. If you itemize your deductions, your mortgage may be a low cost loan that you should think about before paying off. It’s also an inflation hedge to have a low cost long-term loan.

  4. I enjoyed this post. My husband and I are buying our first home very soon, and I am all about paying off the mortgage early. Seeing the numbers (and the potential savings) makes me even more motivated!

  5. Guess what the “additional $117,000 tip” is. Could it just maybe have something to do with credit rating? ;-)

  6. It isn’t always easy to find a mortgage co that allows bi-weekly. And some charge a fee to do so. I just put an extra $100 on the principal each month when I make my payment. It is automatic from my checking–set it up once and forget about it. I know some “experts” say you are better off investing that extra, especially if your mortgage is at a low rate, but the idea of being mortgage-free really appeals to me.

  7. Why pay your mortgage company for the privilege to do this, that does not seem like the smartest idea to me. Have online banking/bill pay? Easy enough to setup a recurring payment every two weeks.

    No need to pay the mortgage company any extra money, and no need to worry about forgetting. Even better why not just make an extra payment instead of going through the hassle of bi-weekly payments.

  8. Couldn’t you just set up autopay from your savings bank to send payments twice/month? why do you need to go through the mortgage company?

  9. funny. sounds like travis and I asked the same question at the same time.

    ok, next question. how can you calculate how much you’d save if you do this later in the loan? Like if you are 5 years into the loan.

  10. I know there are various arguments one could make here, but I wouldn’t advise this… the extra money ought to go into an investment account for the following reasons:

    -extra cash flow in a good investment can is more liquid than home equity.
    -home equity hasn’t got a rate of return per se
    -tax benefits of deductible interest for the reduction of tax liability are undermined by accelerated payment.

  11. …in addition, I forgot to mention that there are some assumptions we’re operating on here. I would, for example advise that you pay off your consumer debt before accelerating payments on the mortgage debt.

  12. @Michael, yes, call your bank and run your what ifs by them (or sometimes they have an amortization schedule online that you can play with…)

    Or if you if you are really committed to paying down the loan, get a 15 or 20 year mortgage instead – the rates are better than a 30 year and you’re paying over a shorter time.

    I kind of agree with Pawel, this advice has been done to death before and this post really doesn’t share much new information. Plus actually recommending the banks fee program to pay down your mortgage is foolish advice and contrary to every other personal finance expert out there.

    • All good comments. A couple responses:

      1. To the people who are suggesting that this isn’t a “new” tip, that’s exactly right. There are no secrets in personal finance. While iwillteachyoutoberich frequently has lots of tips that nobody else does (like my posts on weddings, fuel hedging, barriers, automation, etc), If you’re looking for sexy new tips (!!!), this may not be the right site for you. The reason I’m featuring this age-old advice is that it works, it saves lots of money, and many people don’t know about it.

      2. More importantly, the biggest problem isn’t technical knowledge, but the discipline of doing them. While I focus on big wins, I also focus on automating your money so you can get on with your lives — and while I hate fees with a passion, if it automates a valuable task that you weren’t doing before, it can be worth it.

      As always, I’m open to guest posts if you have other interesting tips.

  13. My mortgage is at ING. I have automated bi-weekly payments and they apply the payments as they are made. It’s the only company I’ve found that does it.

  14. I don’t know how things work in the US, but if you can afford this why not just get a 25-year amortization instead of 30 years? It’s really the same thing if the bank just holds your mid-month payments until the end of the month. If you get paid every two weeks this might make it easier to manage the payments, as long as you don’t mind the fees. For anyone else, just remember (or calculate) the high cost of longer amortizations.

    For those who need other quick tricks to save money, try these:

    - Save up a bigger downpayment before buying
    - Save more while you have a mortgage and make extra payments or increase your regular payments, especially at the start of the mortgage when the actual principal payment may be $100-200; that’s all it takes to repay it twice as fast until the interest portion gets lower
    - Spend less on a house
    - Avoid markets where prices are driven up by low interest rates and easy credit; unless you absolutely need those you benefit when there are less buyers, and your down payment/extra payments will be worth more

  15. I think the mortgage pre-payment story is a good one for people who lack the discipline to faciliate themselves and want to be free of future obligations early and try to time it with say, a kid starting college or retirement or whatever.

    From a pure economic perspective, it isn’t necessarily the best move. I’m in a 4.625% 30 yr conventional. Early on, due to mortgage interest deduction, let’s call it 4.2% since there’s already a standard deduction I shouldn’t double count.

    Now, while Ramit rightly points out that there are some serious interest payment savings to be had, keep in mind that this is over 30 years! The thing that often gets missed in these articles is the Present Value of Money. Two notions: 1) the $117K saved over 30 years is nowhere near that amount in present value, so the $117K sounds much more spectacular than it really is 2) while I’d be paying down my mortgage early at an effective 4.X rate, I could likely be earning more elsewhere. Plus, if I move or refinance (doubtful at this rate, but you never know), now I’m starting the amortization game all over again.

    I know people say the 8%/yr market gains are a thing of the past, but now that we’ve lopped off a good bit of froth from the top, from here going out 30 years, it’s probably not a bad assumption. Long term historical trends usually tend to revert to the mean.

    Additionally, perhaps these additional funds would be put to better use by paying off other debt, starting an emergency fund, or even buying a piece of rental real estate which would provide an additional source of non-market correlated passive income.

    Most importantly, while some of these banks offer systems to do something you can do yourself with questionable value, I’d clearly stay clear of the various third-party software services that claim to do the same thing with some goofy software interface, but charge you $3000+ up front for the “system”. Imagine what $3000 could be worth in 30 years!

    • Darwin’s Finance: Great comment. If you’re in the 5-10% of people who want to optimize the details of your money and you have the discipline to do so, your comment is invaluable.

      Just note: If you think this is you, a good place to look is your behavior of the last 12 months. Have you rebalanced your portfolio? Consistently called your accounts to negotiate them down? Stayed on top of interest rates and calculated where the best ROI for your money is? Your past behavior is a good predictor of the future, so just be sure you’re actually in this small majority of people who actually micro-optimize your money. Many think they want to do this. Few actually follow up.

  16. If BofA doesn’t apply the money until the end of the month anyway, why not keep it in a savings account and just pay it with your normal monthly mortgage payment? Just automate it to pay the amount due + $x in extra principal. I’ve been doing this for almost 4 years now and haven’t missed the extra money.

  17. If banks just hold your payment until the end of the month then the majority of this post is a waste of time. Even if they did apply payments immediately against your outstanding balance then paying bi-weekly would not make sense for most people as the majority of people are paid a salary monthly so would be better off paying monthly as soon as they recieve their paycheck.

  18. I am following a similar strategy, but am simply paying additional principle with each payment.

    As soon as I pay off my high interest revolving debt, I will bump my principle payments up to double every month paying my mortgage off in half the time.

    I simply love the concept & love implementing it!

    Great post.

  19. Ramit,

    Does it work with student loans as well?

  20. I agree that generally it is wise to pay off your mortgage, however under current circumstances I tend to agree with Darwin’s Finance.

    We currently have mortgage rates below 4.9% and have been using any extra cash to buy appreciating assets, such as the Vanguard S&P 500 Index Fund, hoping for a much better return over the long haul. Some of these fabulous stocks were beaten down 80%!

    That’s a long term bet I am willing to take at those kind of discounts! If you believe that the free enterprise system will survive in the United States, you might consider buying assets rather than reducing debt, particularly when you can get money as cheap as it is right now!

    To really build wealth–forget single family! Buy a multi-family property, such as a duplex, and live in half of it. Rent out half of the building and your tenants pay 50% of the mortgage!

    Do that repeatedly and you WILL truly build wealth! Your tenants are paying off the mortgage and you eventually own the buildings free and clear and still take in rents! That’s when you say goodbye to your job!

    There are fabulous deals to be had with all the real estate bargains and foreclosures out there now! Get going!

  21. With respect, Ramit,

    The small percentage you quote (in your response to Darwin’s Finance), is probably your niche audience! Isn’t that what this blog is about? Growing that percentage? Helping young people create sound, sustainable, financial habits and rejecting the hype?

    • Alex, that is a great question. I’m actually torn on how to respond. Let me think about it for a few days. Thanks for leaving your thoughts here.

  22. You can accumulate sufficient cash in a conservative tax-deferred mortgage acceleration plan to pay off a home just as soon or sooner than utilizing the methods described above. Plus you will have the following advantages:
    1) Maintain flexibility, liquidity, and safety
    of principle by allowing the equity to grow in a
    separate side fund where it is accessible in case of
    emergency, temporary disability, or unemployment.

    2) Maximize the only real tax-deductible
    interest allowed by tax reform by keeping the loan
    balance as high as possible until you have enough cash accumulated to pay-off your home in a lump sum

    3) Maintain control of your home’s equity, increase its rate of
    return and keep the equity portable. Your equity should always be
    kept highly liquid regardless of real estate market conditions to ensure that when values decline you do not risk losing your equity.

    These are strategies I educate my clients about and implement on a regular basis.

    In case of an emergency, will your lender allow you to skip a few
    payments because you’ve been making ‘extra’ payments? NO

  23. I am SOOOOOO tired of hearing how real estate is not a good investment. Yes if you bought at the peak of the market and are trying to sell now, it was a bad investment. But I would argue you were a speculator, not an investor. Smart real estate investing doesn’t rely on appreciation. That should be the icing on the cake. What other investment allows you to use other peoples money to purchase, write off (most of) the cost of leveraging that money, and then having someone else pay for that asset when you move and buy a new one? Seriously, buy a home that makes sense financially. In 5-7 years (or sooner) buy a new one and have the tenant pay off your mortgage from the first property. Keep doing this. That simple. Am I missing something? Is there some stock or index fund out there that allows me to buy $100k worth for only $10k, write off the cost to borrow, and then allow someone else to pay it off in the future?

    • Benjamin: To be blunt, yes, you are missing a few things. Leverage can go down, people forget about the phantom costs of maintenance/taxes/fees/insurance, and buying a house in 5-7 years is way too short (the vast majority of the time) since it incurs huge fees. It works for some people depending on your financial situation and where you live, but the idea that real estate is the “best” investment is one of the biggest myths in personal finance.

      I’ve written about this on my buying a house page.

  24. Yes, sending your mortgage company another $1,800 per year (using the numbers from your example) will pay off your mortgage faster. It’s also true that if you send them another $5,000 a year it will get paid off even faster still.

    The general rule here is that if pay more money against your bills those bills will get paid off faster. In the case where there’s interest involved on those bills then you can save money by incurring few interest charges.

  25. … Ramit, were you being serious or sarcastic? If you were being sarcastic, I’d be interested in your serious rebuttal. I’ve been a long-time subscriber to your blog (feed) and greatly respect your body of work.

  26. Ramit, I dont understand your advice on this. In nearly every other post, you advise readers to actually analyze the numbers instead of making hand-wavy arguments, but in this article you don’t analyze the opportunity cost of making early payments at all. What sense does it make to save $71,000 in interest at the cost of $140,000 in stock appreciation?

    Also, in the other article you linked to (from your book), I really don’t like that you emphasize a quote stating that real estate returns have been historically zero. It is extremely misleading to use only price appreciation when calculating the investment return. ALL changes in cash flow ought to be analyzed, including savings from not having to pay rent (as well as taxes/insurance/maintenance).

  27. One thing to consider in the pay mortgage early vs. invest the difference debate is the monthly cash flow consideration.

    If times get hard and money is short and you’ve paid your mortgage off, you need that much less coming in to keep up.

    And all that extra money you used to pay off mortgage debt won’t be losing half it’s value in the stock market during those hard times.

    Sometimes cash is king and having no mortgage payment frees up a lot of cash.

  28. I’ve seen it mentioned a few times above (SBE, Kevin M, MillionaireAdventure) but, biweekly payments aren’t applied to your loan until the end the month anyway (you can actually see it on a statement). This does NOT reduce your interest payment for the month at all. All the benefits come from the extra payment during the course of the year. You can get the same benefit without paying your bank the monthly processing charge by taking your payment dividing it by 12 and adding that to your payment each month (sending in 1-1/12 payment each month).

    This monthly payment may actully be even better as you are applying the 1/12 payment EACH month to principle rather than getting an extra 1/2 payment each 6 months. Lower principle this month means less to pay interest on next month.

    I have seen one company that does a simple interest mortgage where the bi weekly payment IS applied each and every biweekly period so that it does decrease the interest payments in the next pay period (essential, principle is decreased 26x a year). But I’ve only found the one. (Citi through a Primerica rep -> called a $MART loan).

  29. In addition to the $71,000 you save, think about how much extra money you would make during those last five years if you continued to pay yourself the equivalent of your previous mortgage payments and invest it. (You would be used to making the payment, so you wouldn’t feel the loss.) How much extra would you have at the end of those five years at the stock market average?

    Add this amount to the 71k you saved in interest…

  30. @Benjamin Ficker

    I agree with you in that people who bought real estate hoping / praying / wishing for appreciation weren’t investors. However, investing in real estate is still risky. A diversified portfolio of stock doesn’t require nearly as much effort to maintain as real property. With real estate, you have a much greater risk of loss than with stock. If I invest $100K in an S&P 500 index fund and it goes to zero (which is highly unlikely), then I lose $100K. Not so with real estate. If you invest $100K in a $1M piece of real property and it goes to zero (which is far more likely), then you could lose a million bucks because of the leverage.

    Even if you’re just renting out property you previously lived in, you could still lose a ton of money if the tenant doesn’t pay for months, trashes your house, steals everything that’s not nailed down, and bolts in the middle of the night. It happens. Once I invest in an index fund, I’m done feeding it. I’m not contractually obligated to sustain my stock investments.

    I’m not saying that real estate can’t be a good investment, but stock doesn’t seem to pose as much risk as real estate.

  31. Ramit,

    Generally you offer good content. However, I think this post misses some substance. It has a very alluring slogan (“save $71,000!”) but does not bother to give insight in how such huge savings are possible. It sounds too good to be true, and in fact it is (you can make more money by investing in the market – echo Darwin’s Finance).

    Or you can look at it this way: if we do not follow “your” tip and invest the extra ~$2k/year in the market, in 25 years we have ~$200k (assuming 10% yearly appreciation) – half of which is needed to cover mortgage payments in years 26 thru 30, and the other half is profit. So, while your tip may save $71,000, mine saves $171,000. Mind, I do not intend to criticize your tip, rather the superficiality of this blog post. Depth, please! As you usually do!

  32. [...] Have a mortgage? Save $71,000 in interest payments « I Will Teach You To Be Rich :.net, asp.net, best-practices, blogging, budget, business, clustering, coupons, delegates, development, finance, interfaces, marketing, mortgage, patterns, personal-finance, productivity, programming, project-management, rest, screencast, seo, social-media, sql, sql-server, tdd, travel, twitter, vacation, web-design, web-development [...]

  33. Assuming that most of your readers are like 20 and 30 somethings, what is the point of any of us paying a mtg off early? its not likely that the house we own now will be the house we own in 20 years. Sometimes I think you just fish for stuff to post without thinking of how relevant or useful it is for us. Dont get me wrong, I think your intentions are great but just a bit irrelevant sometimes.

  34. Since the average American moves once every 7 years (and refinances every 4) this strategy just doesn’t make sense in this day and age. The book Missed Fortune actually goes a different route. That book advocates always having an interest only mortgage (you can write off 100% since it is always all interest and no principle) that you never pay off. There is a lot more to it than that but overall it makes more sense than paying extra on your mortgage. You won’t be in the house long enough to enjoy the interest savings. All you really do is lower your payoff for when you sell or refinance next and make yourself a higher (that’s right, higher) risk/candidate for foreclosure.

  35. I have so many issues with this post and the lack of long term thoughts. For instance, something as small as the fact that rent will continue to go for the next 50 years of my life, where as my mortgage will not is not being considered. And of course making extra payments will save me all sorts of interest. Thats like saything not making minimum payments on your credit card is a good idea….obvious.

    I truly enjoy the site, and bought the book right away, i just feel since the book has come out, the content here has been lacking, which is actually very understandable.

  36. I think an article could be written based on the comments of this post. Some of these comments are really really great, things I’ve never really thought of before and I’m sure others haven’t either.

    It’s really great seeing that the core audience is full of thinkers and people that are not afraid to “fight back” when something sounds fishy as opposed to blindly following along.

  37. [...] first start by going over what Ramit Sethi’s concept is in “Have a mortgage? Save $71,000 in interest payments” and please correct me if I’m wrong.  Ramit talks about using a bi-weekly payment [...]

  38. I have to agree with Darwin’s Finance, LBG Financial and Lenny. I do commend you on letting people speak freely on here. I’m confused by your admission to Darwin that his way can be better. I guess I’m confused by the purpose of your blog? Is it to show people the most effective and efficient ways to save? or just maybe the easiest? I guess I think that if people can automate an extra payment to their mortgage they could just as easily automate an extra payment to a saving vehicle.

  39. [...] Have a mortgage? Save $71000 in interest payments I Will Teach … [...]

  40. Wouldn’t it be better to use the extra money to invest it and hopefully earn 8% over your thirty years?

  41. @ Alex/Ramit: Let me try:
    IMHO, Ramit’s target audience (by that I do not necessarily mean the reach, the blog would reach both targeted and not targeted audience) is not exactly the people who what to take full control of their personal finance, his target audience is actually the people who are looking for quick/simple solutions to fix many of the major problems and get on with their life. I see his solutions from the 80-20 perspective, where his advice tend to focus on 20 % of major issues to solve 80 % of the problems. That works most of the time

  42. [...] Have a mortgage? Save $71,000 in interest payments « I Will Teach You To Be Rich [...]

  43. This is actually a great comment for me: I am salary, paid bi-weekly, and I set aside half my mortgage out of each paycheck. If, instead of leaving it in my savings at 3-4%, I made my payment twice a month instead of once, I will realize these savings.

    I don’t need to automate, because I already make the payment or segregate the funds manually on payday.

    I agree with some of the other commentors, though, that if your bank doesn’t apply the payment until the end of the month, it’s fairly useless, but in this particular case, my bank WILL apply the payment 2-3 days after it is made, AND I don’t have to pay fees on the payments (unless they are late).

    At first, I didn’t think this would really apply to me, because I can’t afford “extra” payments, but after reading the article, and the comments, I think this is something I can actually do. Thanks!

  44. If you do make additional payments that are not scheduled, just make sure your bank is actually applying them to the principal. While it is not common, some of the less reputable mortgage companies will actually hold additional funds to apply to next months payment, i.e. your loan never gets paid down but the mortgage company gets free use of your funds.

  45. I think there’s a tax advantage to paying the mortgage biweekly as opposed to setting it aside in a savings account for the end of the month. Interest on the bank account is taxable. The interest saved by paying early in the month is not taxable (though there is less mortgage interest accumlated for deductability which slightly reduces the effect).

  46. Alex,
    You are the only one here that gets it. Keep your money out of your house. If you wouldn’t put a grand under your bed, don’t put 300K in your walls. Lost opportunity cost: everyone here learn about it. Take whatever you’re giving towards extra payments (giving money back to a bank to lend to some other schlepp and make more arbitrage money), invest it in a fixed or very conservative vehicle (there are lots to choose from and I’m NOT a VUL guy), and CONTROL YOUR MONEY. You don’t control your money giving it back to your bank, ever.
    Year 22 of this plan comes up, you lose your job or become disabled but have one, maybe two years worth of savings (prudent, right?), you will lose everything- everything. You went through your savings, your LOC is tied up in equity in your house, and unless you’re 59.5 you’re robbing your retirement to avoid foreclosure. You’ll wish you had 22 years of $1800 a year of pre-paid equity dollars compounding at 6% (1%!!?? I’ll take it!) someplace where you have access to it.

    Now you can’t refi, can’t apply for a heloc, can’t get a loan, ’cause you have no income and you’re money is trapped in the house. Bank forecloses on built up equity homes MUCH faster than no equity because the risk is much lower and it’s easier to sell.

    Follow the money… Saving is NOT the same cash or cash flow. Cash is King, Cash flow a Queen, equity a joker. See you on the beach Alex ’nuff said.

  47. My mortgage with Citicorp uses an option for bi-weekly payments. Not only no fee, but a .25% break on the rate for being in the auto-pay program. Payments are credited when received and they calc simple interest. Any better?

  48. Gman – spoken like a gentleman, heh.

  49. The book “How to Own Your Home Years Sooner – without making extra interest payments” by Harj Gill describes a way of paying off your mortgage faster than the bi-weekly by making large payments by using a HELOC as a checking account. A sample calculator to see how fast it would pay off a mortgage is at http://www.eqxl.com/
    Search for mortgage accelerator on google to find info on the subject or read the article on msn http://articles.moneycentral.msn.com/Banking/HomeFinancing/ANewWayToPayOffYourHouse.aspx

  50. Ramit, I followed the link to your book excerpt and in there you give opposite advice – that money invested in an index fund will outperform mortgage prepayments every time. So which is it?

  51. We bought our house in 2001 with a 30 year fixed mortgage at 7%. Refinanced in 2003 to a 15 year note at 4.875%, and between the interest rate decrease and buying a relatively inexpensive home to begin with, cutting 13 years off our mortgage ended up costing about an extra $100/month. So it was a small enough increase that we didn’t cut into investing or other saving to make the switch.

    Back of the envelope numbers going from memory-
    Original mortgage amount in 2001: $119,000
    Refinance amount in May 2003: $117,000
    Current mortgage balance: $79,000 or thereabouts

    DJIA in mid-May 2003: call it $8600
    DJIA on June 18, 2009: $8500

    So short to middle term, paying down the mortgage came out significantly ahead of throwing more into the index fund. And although our state (Florida) is one of the big foreclosure places, my area didn’t overbuild/oversell like parts of the peninsula did so prices are still higher than when we bought. Similar homes today are listing and selling in the $210K-$240K range. (and it’s actually kind of hard to find that sized started home in our area, so prices are pretty stable right now) Since we haven’t gone the HELOC route (though we’re thinking of doing so later in the year to deal with some window/roof/flooring issues) if we had to sell, we could price under current market and still walk afay with six figures in our pockets.

    Way it’s worked out for us, I’m glad we didn’t put the extra $100/month in the mutual fund instead.

  52. The article and comments combine to make for some great reading. Ramit – you may not have gotten it exactly right with the post – but you sparked a terrific conversation. well done.

  53. OK. I got excited ,so I called CitiMortgage. And I asked them if they apply the payments in their bimonthly plan or weekly plan immediately. No they don’t! They simply have you pay a 12th extra, but charge you a percentage for their service. That is a real scam. CitiBank does not accept partial payments. Anyone can duplicate the same results of the bimonthly payments by simply paying an extra 12th towards the principle. It’s easy to set up yourself online.

  54. I contacted my bank to electronically pay my mortgage every two weeks. There is a $4.00 setup fee and then a $1.00 charge per electronic transaction, which is $338 over the life of the loan to save $7000 in interest. Fees are a rip off, but the payback is worth it.

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