How to Save $30,000 on Your Mortgage with Zero Extra Effort
Would you believe us if we told you that 10 minutes of your time could potentially save you tens of thousands of dollars on your mortgage? How about if we said those same 10 minutes could help you pay off your mortgage years earlier than anticipated?
There are no catches, gimmicks, or extra income required! Just a simple switch in the way you pay your mortgage every month. Now that we’ve got your attention, let’s get right down to it.
The Simple Strategy
If you’re like most, you pay your mortgage in full each month sometime around the due date. The strategy we will outline here is a simple switch that will allow you to pay your mortgage bi-weekly, instead of once per month.
This spectacularly simple trick could save you tens of thousands in interest payments and shave years off your mortgage. Real life examples below.
If your employer pays you bi-weekly, this will be as simple as setting up an auto-pay plan with your bank to pull half of your monthly mortgage payment from each paycheck. If you’re not paid bi-weekly, you can still set up bi-weekly auto-pay payments; just be sure that you have enough in your account upfront to avoid over-drafting your account.
There is only one CRITICAL rule you need to follow: The first month that you make the switch, make sure you pay in full and on time!
There’s no magic in this process, it’s simply math. Not the kind that asks you to find the area of a rhombus you could never figure out in school. The cool kind of math that means you’ll save a boatload of money! There are two main ‘behind the scenes’ things happening mathematically when you make the change to bi-weekly payments.
The first is simple. There are 52 weeks in a year, so paying bi-weekly results in 26 payments over the course of a year. This essentially results in making 13 monthly payments per year, instead of 12 payments.
That one additional payment goes entirely towards the principle balance of your mortgage. While this alone may not seem like it can make that much of a difference, over the course of a couple decades, it can truly make a huge impact (see figure 1 below for specifics).
Let’s take a quick look at the impact this strategy has on the principal balance of a real-life mortgage at the end of each year over the first 10 years. We’ll use a 30-year fixed rate mortgage on a $250,000 home. Let’s assume the mortgage has an interest rate of 3.93% (which is the current average interest rate in 2019).
Part of the beauty behind this strategy is that you end up paying more over the course of a year, without feeling the impact month-to-month. It will still feel just like you’re paying as much as you were previously, just with two payments each month instead of one.
Going a Step Further
There’s one other mathematical calculation to be considered but it will only impact some homeowners, as certain mortgages accrue interest on a daily basis. If you have a mortgage that is structured this way, making this change will be even more significant in your long term results.
The reasoning behind this is that each month you essentially end up paying half of your mortgage two weeks earlier than you normally would have. That leads to 14 days where you will accrue interest on a lower balance than they would if you paid monthly. Again, repeating this process over the course of a couple decades REALLY adds up.
“How much” you ask? Let’s look at another real-life example.
Again, we’ll use the same 30-year fixed rate mortgage on a $250,000 home just as we did in the example above. Take a look at how staggering these results are:
In this case, this simple trick saves the homeowner $28,310.81 and shaves 5 years off the mortgage! That’s a savings of more than 10% of the total value of the home! We don’t say this lightly when we say this simple trick really is a game changer in your debt management.
This one simple trick saves homeowners over $28,000 on a $250,000 purchase!
One other point worth highlighting from this scenario is the amount of interest customers pay on a typical mortgage. Breaking the numbers down this way, you can see you’re paying well over 50% of the price of the home in interest on a typical mortgage.
This is why we stress the importance of understanding and managing your credit score. A solid credit score could result in a lower interest rate on your mortgage, thus significantly lowering the amount of interest paid. For more information and tips on how to manage your credit score, check out our article Understanding Your Credit Score.