Do-it-yourself mortgage savings
There's an easier way than sending in 2 payments each month
BY BENNY KASS, TUESDAY, JULY 26, 2011.
DEAR BENNY: My lender just sent me a form notice suggesting that I can save a lot of money if I start making two mortgage payments each and every month. Does this make sense? --Jill
DEAR JILL: There is a trade-off on what is called a "biweekly" mortgage. Yes, you will save paying a lot of interest, but, depending on your tax bracket, your interest deductions will also be reduced.
Let's take this example: You borrow $200,000 at 4.75 percent for 30 years. From the amortization table, you know that your monthly payment (excluding taxes and insurance) is $1,043.30. If you continue to pay this amount each and every month, on the 360th month, you will have paid off your mortgage completely.
But let's say that instead of paying monthly, you decide to make two payments each month. In effect, you are now making 13 monthly payments each year, which will reduce the number of years you have to pay down to between 22 and 25, instead of 30.
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But does this make sense? I think not. As I have written on several occasions, you can accomplish this same goal by adding additional funds when you make your monthly mortgage.
In my example, since your monthly mortgage is $1043.30, divide that by 12 ($86.94) and add that amount to your monthly mortgage. You get the same benefits as with the "biweekly," but you don't have to send in two payments. More importantly, you are not obligated to make those extra payments if your financial situation changes. With the biweekly, you must make two payments per month.
If you opt to make a larger monthly payment, make sure that you write on your check "extra payment to principal in the amount of XX," and also make a notation on any coupon that you have to send in. If you have arranged for automatic payments from your bank, send the loan servicer a letter advising that you are making additional payments toward principal.
And at the end of each year when you get your mortgage balance statement, confirm that all of that additional money has, in fact, been credited.
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