Beat the Crud Out of Your Mortgage - Round 2
Hello, and welcome! If you’re just joining us, my last post I said that if you want to put the hurt on your mortgage, you gotta punch it in the principal (the amount originally borrowed). There was growling, I was squinting, and a plethora of cheesy boxing parallels were employed.
You heavyweights already played around with the calculator to see how various amounts of extra payments will punish your mortgage.
Once you’re convinced you want to do this, it’s a matter of strategy. I promised to share my favorites, so here they are:
1. Automatic biweekly payments.
Mortgage payments are typically collected monthly, so paying biweekly packs the same wallop as forking over an extra payment every year. Good news: 100% of the extra payment hits your principal directly–boom! In our created scenario ($100,000 at 4.5% interest), making 26 biweekly payments per year instead of 12 monthly payments would knock almost 5 years off our 30 year loan and save us $14,519.87 in interest–bam! Put in your own numbers here to see how it would impact your mortgage.
How to get it done:
- Have someone do it for you. Banks and third-party services will gladly take this job off your hands and direct draw from your checking account. I’ve seen setup fees at $400 + $40/month, which comes to more than $3,000 over the life of your loan for this service. It costs, but it’s better than not doing it at all.
- Your lender may already do this for free. Call and ask if they will automatically take payments from your checking account every two weeks instead of monthly. If so, boo-yah!
2. Overpay your mortgage a little every month.
You can get the same effect by overpaying. No setup, no fees, cancel anytime. Take your payment, divide it by twelve months, and tack it on. In our scenario, that comes to: $506.69 / 12 = $42.22. Add that to our monthly payment and pay $548.91 each month for full impact.
Tip! If you pay by check, you may have to write a separate check and write something like “mortgage principal” on the memo line. Call your lender to confirm this.
3. Tuck it away, earn a little interest, and pay it all at once.
(This dodge-counter approach is a little more advanced. Depending on the interest rate on your savings account, it may be more hassle than it’s worth but I’ll leave that to you.) Take the same amount from the method above ($42.22) and have it automatically transferred to an interest-earning savings account every month. Choose a date, and agree with yourself to withdraw that money and catapult it at your principal in one annual lump. May I suggest you not choose a date near major holidays? Something closer to tax refund time would help with your follow through.
Well, there’s the bell and that’s all I got for now. Get out there and tear ‘em to pieces, Champ!