How do you eat an elephant? One bite at a time!
Many of my Kentucky readers are looking for ways to save some money and I have been adding deals for coupons and ways to cut expenses in my weekly newsletter, "I Love Kentucky News".
One of the best ways for the long term is to pay off your mortgage early.
Below is an article by Russ Ravary about an easy way to take 7 1/2 years off your 30 year fixed mortgage.
Remember, it's these small steps that add up to BIG savings down the road.
Have you ever been approached my your mortgage company or another company to join a bi-monthly payment program?
They usually want to charge you a $250-$500 setup fee. Then they want you to send in half of your payment ever two weeks. So lets figure this out. Let's say your mortgage payment is $2000 a month. So normally you would send in a total of $24,000 a year.
But this new bi-monthly company wants you to send in a $1000 every two weeks. They hold the first $1000 until you send in the the second $1000. Then they send in your mortgage payment.
So each payment they are charging you a $3 - $6 processing fee. But the essence of the program is that they are getting you to put more money on the principal each year. But what they are doing is collecting an extra mortgage payment each year. There are 52 weeks in a year and you are paying a half a payment every two weeks.
So if you make 26 payments of $1000 it adds up to $26,000. $2000 more a year added to your principal. That's how the bi-monthly program works.
But what is neat about all of this is that you can do it your self and save yourself the set up fee. You can save the processing charge each month too. All you have to do is send in an extra payment a year. Divide your payment by 12 and add that to your payment each month.
By adding 1/12 of your payment each month you can cut off about 7 to 7 1/2 years off your mortgage. You can save thousands of dollars in interest by doing the bi-weekly program.
Liz - I don't know why people would pay others to do this for them. I have always tried to pay extra on my mortgage, but only if I had no credit card balance. The best thing to do is to pay extra on credit card balances which usually carry a much higher interest rate than mortgages.
Mike - Good point! Get those credit card balances paid off first!
Lizette: This is a great suggestion, and one that I have made with many of my clients in the past.
There is even software available that will actually tell you how much extra you should add to your payment if you want to pay off your mortgage by a certain date. For example... you buy a home... then have a child. You decide you want to pay off the mortgage by the time your child reaches age seventeen... because you know college expenses will be kicking in. This software tells you exactly how much to add... so the balance ends up paid in full the month your child graduates high school... or whatever other date you choose. Cool stuff !
The power of compound interest is amazing. It can work for your or against you. I also suggest for many of my clients that get a tax refund to consider contributing the refund towards their mortgage.
I've seen that program and there is a savings over time. Other ways to pay down your mortgage early is to add an extra payment each year. You can do that by increasing your mortgage payment by 1/12. It does pay dividends in the long run.
Lizette--Great explanation for homeowners. Some people don't want to be locked into making that additional payment every month. So for those months around the holidays or at other times when something comes up, they just don't have to make the payment...But get right back on track or that elephant will never go away!
Hi Lizette,
This is a great post for first time home buyers that may not be aware of these payments. Here in Canada we call them bi-weekly payments. They sure do make a difference.
great explanation. I do however agree with those who say pay off your credit cards first for the greatest savings.
Marcy Moyer Intero Real Estate Menlo Park, Ca.