I wrote this post several months ago. As soon as I was liberated from the onerous 6.8% interest of my student loans, I turned my attention to my next most expensive (highest interest) debt. My then mortgage was a doctor’s loan taken out before I started pgy1 and its 4.375% 30 year fixed interest was quite high in hindsight.
So my options in saving money on my mortgage included:
- pay the mortgage more frequently (effectively lowering the principle more frequently.) the most common way people do this is to switch to a biweekly instead of monthly mortgage payment.
- refinance my mortgage to a lower interest rate.
- throw extra money at my mortgage whenever there IS extra money. (ha, there is rarely any extra money. and if there’s any, I’d put it into ROTH IRA and ROTH 403b rather than paying down mortgage.)
The following post is my calculations when I was exploring option 1. convert my mortgage to a biweekly mortgage.
When all’s said and done, I went for a NO cost refinance (all I paid was appraisal fee, so it did cost me $400) and refinanced my doctor’s mortgage to a 7/1 ARM. It lowered my interest rate by 1%, which translates into lower monthly payment AND a greater amount of principle paid monthly. But for those who like to keep their mortgage for longer, converting to biweekly CAN save you quite a bit in the long run.
| Standard (Am. Table) |
Bi-Weekly (Am. Table) |
|
| Length : | 30 Yrs 0 Mts | 26 Yrs 3 Mts |
| Time Saved : | 3 Yrs 9 Mts | |
| Bi-Weekly Payment : | – | $459.93 |
| Monthly Payment : | $919.56 | $996.51 |
| Total Interests Paid : | $123,041.64 | $105,424.33 |
| Interest Savings : | $17,617.31 | |
| Tax Savings : | $31,990.83 | $27,410.33 |
| Tax Saving Losses : | $4,580.50 | |
| Total Benefit (Int. Savings – Tax Saving Losses) : |
$13,036.81 | |
| Here’s the paraphrase of the above results.
When you set up your mortgage payment repayment plan, you can choose between a standard repayment plan or a bi-weekly repayment plan. With the standard plan, it would take you 30 years to repay the loan while a biweekly plan will take 26 years and 3 months. This will save you 3 years and 9 months. But, the savings doesn’t end there.If you took out a $208,000.00 loan with an interest rate of 3.375% and your federal tax rate is 26.000%, you can expect to pay $919.56 per month, while a bi-weekly payment plan will call for a payment of $459.93 every other week. As a result, you will pay only $105,424.33 in interest with the bi-weekly schedule rather than $123,041.64 with the standard payment plan. While this will result in a loss of $4,580.50 in tax benefits, you will still save a total of $13,036.81 with the bi-weekly plan. |
For my particular case, I’d like to either pay off the entire mortgage in 7 years OR sell the house. So my potential savings is less compared to someone who will let their mortgage run for 30 years. I ran the numbers and Iearned that after the fees of converting to biweekly payemnt, my savings over 7 years would be only a few hundred dollars. So I went for option 2 and started shopping around for mortgage refinancing.
On the other hand,
biweekly may make sense for you if the interest rate on your mortgage is much higher. Bi-weekly will allow you to pay down your principle more frequently and hence saving you money by lowering interests acrrued. biweekly also helps you if you keep your mortgage for longer. The earlier you convert to biweekly and the longer you keep your mortgage after convserion, the more you stand to benefit from a conversion.
But be sure to do your math and account for the conversion fee (there’s usually an upfront conversion fee. I got a quote of $150.) Some companes processing the biweekly payment will also charge a $2-3 fee per mortgage payment. These fees can add up and easily eat into your savings.
- Are you happy with your current mortgage rate/terms?
- Have you refinanced yet?
- Did you try to conver to biweekly payment?
- What mortgage product/move saved you money?
Comment below!
