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

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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.

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

* * *
See the specifics: If you liked this, Andy Jolls from videocreditscore.com 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.

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72 Comments on "Have a mortgage? Save $71,000 in interest payments"

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Paweł Kata
7 years 2 months ago

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?

SBE
SBE
7 years 2 months ago

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.

Steve
Steve
7 years 2 months ago

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.

Mrs. D2S
7 years 2 months ago

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!

F
F
7 years 2 months ago

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

Susanamnm
Susanamnm
7 years 2 months ago

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.

Travis
7 years 2 months ago

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.

Michael
Michael
7 years 2 months ago

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?

Michael
Michael
7 years 2 months ago

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.

Alex
Alex
7 years 2 months ago

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.

Alex
Alex
7 years 2 months ago

…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.

JT
JT
7 years 2 months ago
@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… Read more »
Jen
Jen
7 years 2 months ago

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.

Silicon Prairie
7 years 2 months ago
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… Read more »
Darwin's Finance
7 years 2 months ago
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… Read more »
Kevin M
Kevin M
7 years 2 months ago

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.

MillionaireAdventure
7 years 2 months ago

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.

Matt Jabs
7 years 2 months ago

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.

Carlisia
Carlisia
7 years 2 months ago

Ramit,

Does it work with student loans as well?

FrugaltoRich
7 years 2 months ago
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… Read more »
Alex
Alex
7 years 2 months ago

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?

LBG Financial Services
7 years 2 months ago
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… Read more »
Benjamin Ficker
Benjamin Ficker
7 years 2 months ago
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… Read more »
Joseph Scott
7 years 2 months ago

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.

Alex
Alex
7 years 2 months ago

… 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.

Jeremy Freelove
Jeremy Freelove
7 years 2 months ago
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… Read more »
TMS
TMS
7 years 2 months ago

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.

Yougotiger
Yougotiger
7 years 2 months ago
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… Read more »
evie
evie
7 years 2 months ago

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…

Shawanda
7 years 2 months ago
@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… Read more »
F
F
7 years 2 months ago
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… Read more »
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Nl
Nl
7 years 2 months ago

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.

Lenny
Lenny
7 years 2 months ago
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… Read more »
Dan Parhar
Dan Parhar
7 years 2 months ago
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… Read more »
Kuhle Kitchen
7 years 2 months ago

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.

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[…] 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 […]

CJ Bowker
7 years 2 months ago

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.

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

sy
7 years 2 months ago

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

money blog
7 years 2 months ago
@ 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… Read more »
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RStewie
RStewie
7 years 2 months ago
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… Read more »
Chris
7 years 2 months ago

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.

JJ
JJ
7 years 2 months ago

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).

Gman
Gman
7 years 2 months ago
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,… Read more »
DaveS
DaveS
7 years 2 months ago

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?

Alex
Alex
7 years 2 months ago

Gman – spoken like a gentleman, heh.

Rick
Rick
7 years 2 months ago

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

Daniel
Daniel
7 years 2 months ago

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?

InspectorFox
InspectorFox
7 years 2 months ago

Amortization Schedules and Principal Prepayment, Part 1: Shortening a 30-Year Mortgage Into 15
http://www.mymoneyblog.com/archives/2009/04/amortization-schedules-and-principal-prepayment-part-1-shortening-a-30-year-mortgage-into-15.html

Jill
Jill
7 years 2 months ago
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… Read more »
Kristen  Sullivan
7 years 2 months ago

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.

camille
7 years 2 months ago

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.

Kevin
Kevin
7 years 1 month ago

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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[…] and offers a rent vs buy calculator. If you do have a mortgage, Ramit offers optimization tips on decreasing the amount of interest you’d […]

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

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[…] be making what’s called  principal pre-payment. If you have a 30 year mortgage, you can save thousands by making extra payments. One of the best ways to keep yourself on the plan is automating your extra mortgage payment with […]

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7 years 8 days ago

[…] We also decided to go for a lower mortgage because we are planning to accelerate mortgage payments and save tens of thousands on interest. […]

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[…] Buyers with the best credit scores, for example, pay tens of thousands less in interest than buyers … If you’re smart, you’ll also want cash left over after the closing as an emergency fund. […]

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[…] came across this link. Talks about how you can make payments (Principal + Interest) twice a month instead of once a month […]

Jhon lee
2 months 29 days ago

admin your super

Jhon lee
2 months 26 days ago

I enjoyed this post

lutils
1 month 1 day ago

I am using this website http://www.cutloan.com
to calculate how much interest i can saved with extra monthly mortgage repayment.

Katie Wilson
Katie Wilson
3 days 30 minutes ago

Pretty interesting article. You should connect with the correct mortgage banker/broker based on your situation via http://www.inzopa.com as they have vetted several mortgage professionals all over the country!

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