I have a what I thought is a simple question but can't seem to find the answer online... (probably because it makes no difference). I'll use this example:

Ignoring taxes and insurance, assume a 30 year fixed mortgage with a loan amount of $415,000 at 5%. Monthly payments would be about $2227. If you paid $3000/mo instead you'd cut your 30 year mortgage down to about 17 years and save tons on interest.

My question is, instead of paying $3000 once per month, what if you paid half of that, twice a month? Let's say $1500 on the 1st and then $1500 on the 15th, would it make any difference in terms of saving on interest and the amount of time required to pay off the loan?

I read that if you make bi-weekly payments on your 30 year mortgage you could pay it off about 5 years faster. From what I can tell bi-weekly is only beneficial because it essentially equates to making one extra monthly payment per year. I'm NOT talking about making a $1500 payment bi-weekly. I figure also since you're making more frequent payments, I would think you would save 15 days worth of interest on the extra principal amount paid for each month over the life of the loan that should equate to finishing the loan quicker too.

Wth that logic I figure instead of paying $3000 in one monthly payment cutting your mortgage down to 17 years, if you paid $1500 twice a month maybe you could cut the mortgage down more from 17 years to 15 years or something? Or does it make no difference? Am I making sense?

 

Not an expert but from what I know, yes it makes sense to pay bi-weekly as it does pay down the mortgage earlier than monthly payments. But the savings don't come from saving that 15 days of interest. While there may be some small savings there, the real benefit is that you end up making that extra month's payment every year and that all of it goes towards the principal. Just as the difference between your $3,000 payment and the $2,227 all goes toward principle...

 

Mark,

What worked for me in the past is I asked the lender to apply any excess payments I make each month towards the principal. If you plan to pay off your mortgage in 15 years, I suggest you try to negotiate with your lender a 15 year term with a lower interest.

 

Many lenders will offer a "deal" to let you pay 2/month and they charge a fee to do so. I have always just paid what I wanted to and the excess was applied to the principle.

Mark, look up the "Clark Howard" web site. He offers links to formuli the let you do the calcs your self. Many other financial sites offer such links also.

GL

sixcard

 

Some (really most) lenders will charge you a fee for that Bi-Weekly program. It would be the same if you were to just save the extra you were going to put in and put it in an interest baring account (although rates on savings are terrible now) and just apply it to your principle at the end of the year.

Or, just do what you planned make the extra payments monthly, but be sure to let them know its to PRINCIPLE ONLY.

 

I do not think that paying $1500 twice per month would save anything,in fact it would lengthen the term slightly.
Case 1:-$3000 per month
If P is the principal sum,the first month interest (calculated daily) would be on P-$3000,the second month interest would be on P+I1-$6000,etc.I1 is the first month interest.Your annual payments would be $36000.

Case 2 :-$1500 on 1st of month,$1500 on 15th of month
First MONTH interest would be 14 days on P-$1500, PLUS 16 days on P-$3000 (for a 30 day month).
Your annual payments would again be $36000.

Therefore the interest for the first month would be slightly HIGHER in case 2,due to the first 14 days interest on a higher sum.This would be repeated each month compared with case one.

Hence,case 2 would lengthen the term.

As you rightly say ,a bi-weekly payment results in $39000 being paid annually and it is that extra $3000 that results in reduction of the term.

I am my own financial adviser!

 

Mark,
Here is the difference... If you pay $3000/mo, you make 12 payments per year. $3000 x 12 payments = $36,000/yr.

If you pay bi-weekly, this doesn't mean 15th and 30th, it means every 2 weeks. There are 52 weeks/yr, so if you pay bi-weekly, you make 26 payments/yr. $1500 x 26 payments = $39,000/yr, $3000 more per year than on the monthly plan.

In essence, the bi-weekly payment plan forces you to make 1 extra monthly payment per year.

Hope this helps.

EDIT: You already mentioned this in your original post, so I guess this was a big help

 

Yeah guys as I thought it makes no difference. In my head it should though but the banks compute your interest for the entire month regardless of when or how often you pay so it ends up having no effect. All the more better, one larger payment per month can be made instead of multiple smaller payments.

 

Why would a person with an out-of-warranty e60 concern himself with such trifles?