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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.

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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:

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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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70 Comments

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  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.

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