What necessity would you like to save on each month? Some people might say gas (since it’s back up to almost $3 a gallon AGAIN! Grrrrr!), others might say transportation.
If you said your daily Starbucks run, then stop reading and go stick your head in the sand for another 5 years. I can’t deal with you yet.
My answer would be taxes. That would save me thousands each year, but since I can’t stop paying those till I die I choose to save money on my biggest monthly expense…my house. It makes sense, if you want to find the biggest saving opportunities choose your biggest expense, it’s where you can cut the deepest.
I know, I know. You’re thinking ‘I can’t cut the amount of money I spend on my housing!’ You think that because you’re in a fixed rate mortgage for the next 30 years of your life. You pay the same amount on the same day of every month.
Are you ready for the But? Here it is! You CAN save thousands of dollars on your mortgage with this trick a rich friend of mine taught me! And the best part is, is that the bigger the mortgage the bigger the savings!
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The secret of this trick is in the payment schedule.
How many weeks are there in a year? 52.
What is 52 weeks divided by 2? 26. 26 is every other week in a year.
Everyone pays their mortgage once a month totaling 12 times a year. Instead I want you to pay half your mortgage every other week (bi-weekly). You’re not paying a higher amount, most months; you’re just changing the timing of your payments. The trick is that when you pay bi-weekly you’re actually making 26 half payments a year. Thus you’re making one extra full payment a year. If you were to simply cut your mortgage in half and pay it in 2 installments instead of one you’d only be making 24 payments a year and you would not get the savings benefit.
Here’s an example of what I’m talking about. Say your mortgage is $2000 a month and you pay it on the 15th of every month. That adds up to $24,000 a year in mortgage payments. I want you to split your payment and split the payment timing so you’d pay $1000 every other week. At first glance it seems as though you’re not doing anything different than how you normally pay your mortgage. Well, if you take that $1000 and multiply it by 26 weeks (which is bi-weekly) then you get $26,000.
$26,000 is one extra payment a year. Plus you’re applying money to your principle and interest more often, instead of just once a month. This reduces the overall amount of interest that accrues each month.
Now that I’ve explained how this little trick helps you sneak in an extra payment I want to tell you why I want you to change the timing of your mortgage payments.
This trick saves you serious cash. We’re talking MUCHO DINERO.
Think about it, most people get paid bi-weekly anyway, so splitting the bill between your two paychecks might help you stay within budget a little easier each month. And staying in our budget keeps us out of debt. For example wouldn’t you rather pay as you go instead of a balloon payment all at once? Budgeting for one big payment is not everyone’s best skill; this trick makes it easier to always pay your bills.
The other bonus is the real bonus. It’s why I’m telling you this trick of the rich.
By switching to bi-weekly mortgage payments you get the benefit of applying the extra money directly to your principal. Why would you want to do that? Because it reduces the amount of money you pay over the life of your mortgage loan.
For instance, did you know that if you have an interest rate of 5.30% on a 30-year fixed rate mortgage you’ll be paying twice the amount of the purchase price you agreed to pay when you bought the house? If you bought a $300,000 house in 2000, by 2030 you will have paid your mortgage lender $600,000! That’s insane!
What’s even scarier is all this talk of having to raise interest rates soon. When the Fed raises its rates, mortgage rates will go up too. If mortgage interest rates go up a few percentage points to an average of 9 or 10 % like they were in the late 1980’s then were really in trouble. A loan rate of 9.39% will require you to pay back nearly three times the amount. So a $300,000 house will cost you $900,000 over the next 30 years. Yikes!
When you reduce your principal you reduce the total amount of interest you have to pay your mortgage lender!
Winner…YOU!
Loser…The Banks.
Here’s the caveat. Make sure your bank allows you to do this!
Almost all banks will allow you to make bi-weekly payments. Some banks will charge you an enrollment fee if you change to this type of payment plan. Check out the fees at your bank to make sure your extra payment offsets the fee. Chances are it will.
Also some people don’t like the extra paperwork that making this change involves. I just roll my eyes when someone uses a lame excuse like this. Why do I roll my eyes? Because that’s a ridiculous response. A little extra paperwork may give you a headache for an hour, but isn’t saving thousands of dollars worth an hour of your time?
OK. Let me give you a concrete example because sometimes when I say the words “thousands of dollars” you gloss over that. It becomes an intangible number. I want to show you a real money example.
A $300,000 home loan at 6% will require that you pay over $347,500 in interest ALONE over the life of your loan. Plus the $300,000 principal for a total of $647,500 (what’s even scarier is that I’m rounding down here. Actual amounts would be even higher!). Paying one-half of your regular monthly mortgage payment every two weeks will result in lowering the amount of interest you pay over the life of the loan to $276,591.12. That will save you over $70,000!
Imagine what you could do with an extra $70,000 in your pocket!
To check out exactly how much you could save on your mortgage plug in your data to this mortgage/interest calculator .
Even beyond saving yourself $70,000 you shave over 5 years off the life of your loan. So you get to stop paying your mortgage even sooner than you thought! You’re putting yourself one step closer to financial freedom. Do this today!
Isn’t it amazing what such a small change in the way you pay your bills can do for your wallet?
Keeping Money In Your Pocket,
Nancy Patterson
