The article considered the benefits of making a mortgage payment every two weeks rather than one time per month. The article looks at it from several different angles, but the basic concept is simple - and worth repeating for home-buyers looking for value:
- If you pay a full payment once a month and your mortgage payment is $1000/month. You repay $12,000 each year.
- If you pay 1/2 a payment every two weeks, and your mortgage payment is $1000/month. You repay $13,000 each year.
You've paid an extra $1000 - or a FULL EXTRA PAYMENT EACH YEAR - by making 1/2 payment every 2 weeks. The real benefit is what happens to that extra $1000. Typically, it directly pays down the principal - which means you have less money that you need to pay interest on. Because you have less interest to pay, you pay off the balance earlier.
The article goes on to calculates, "With [a 30-year fixed rate loan] at 4.5 percent, payoff would require 25.7 years ... $13,619 for each $100,000 borrowed." I wanted to put that saving in terms of the purchase price - and make the saving feel more real (rather than 30 years out):
If you make bi-weekly mortgage payments for a home at the current Manhattan average price of $835,000, you would NOT pay $90,975 in interest! So what? Think of it this way. $90,975 is 10.8% of that purchase price!!! You could be giving YOURSELF that savings ... with just a little bit of discipline to send a payment every two weeks.
Read more....Here's the Perma-link to: The Benefits of a Biweekly Mortgage Plan - NYTimes.com article
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