Savings

Simple Savings Sunday #10 – Extra Mortgage Payments

simple savings sunday tipsWelcome to another edition of Simple Savings Sunday.  I hope everyone has had a wonderful weekend.  I know my wife and I have been busy running around.  We are deep in the process of putting the house on the market.  We have carpet guys coming to repair some issues and a Realtor heading out.  I am conducting interviews to see which company I want to go with.  We also just rented a storage unit in order to declutter the house.  No matter what, there was a good amount of money spent this weekend, I you know I am not a fan of that.  Either way, this week’s saving tip is about making extra payments on your mortgage.

Making Extra Mortgage Payments

There was an article on Modest Money by a guest author.  The title was “Why Making an Extra Payment on Your Mortgage Will Get You Nowhere!”  I thought the title was interesting, so I checked it out.  After reading it, I was not really happy.  The author of the post, who is in the banking industry says that if you make biweekly payments on your mortgage, you will only shave off 1.5 years.  Now, the typical speech for biweekly payments is that you will shave off 7 years, but this all depends on the interest rate.  For my mortgage, if I make biweekly payments, I shave off 6 years and 4 months.  That is close to 7 years.

The author used the following information about the loan.  It is a 30 year mortgage with a 4.5% interest rate.  She doesn’t talk about escrow, taxes, or PMI just to keep the calculations simple.  That is cool with me.  As I indicated, her indication in the postis that you will only save 1.5 years pay making biweekly payments.  I looked at it and thought it seemed very low.  The math has been proven time and time again.  Unless you have a super low rate, like 0%, then making biweekly payments will shave off time.  It is simple math.

I thought I would provide some information in my comment and say that for my loan, I would shave off 6 years and 4 months.  I then did the math for her exact loan information. I  found that if you do biweekly payments, you will shave off 4.3 years. That seems to be more than 1.5 years.  I used multiple tools to get this information.  There is a great calculator at Bankrate, but there are many different mortgage calculators that can tell you this.  I also did the work in Excel just to see if I could match it.  None of the tools, nor my calculations, came up with her low 1.5 years.  I called her out on the math and so did almost every other commenter, but she stuck to her guns.  You only can say so much before you just have to move on.  I know there are plenty of people that have done the extra payments and seen the results.

biweekly mortgage payments chart

You WILL Save With Extra Mortgage Payments

While the amount you save in interest and loan length will depend on a wide variety of factors, if you make extra payments on your mortgage, even just one a year, you will cut down how much you pay in interest and how long you will pay on your loan.  It is a simple savings tip.  It is also simple math.

I don’t mind if you come up with a controversial topic, but if you are going to do math in order to back up your entire premise, then do the math correctly.  I work in Excel everyday.  Do you know how easy it is to mess up a math formula?  I am certain that all of the mortgage calculators out there are not wrong.  As I said, it is simple math that is tried and true.  Math typically doesn’t lie and in this case, it will be on your side to make biweekly payments or one extra payment per year.  You will save time and money.

Did you read the article?  What is your take on making an extra payment or biweekly payments?

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Grayson Bell

Grayson Bell

I'm a business owner, blogger, father, and husband. I used credit cards too much and found myself in over $50,000 in debt. I paid it off, started this blog, and my financial life has changed. I now talk about fighting debt and growing wealth here. I run a blog management company, along with another blog. It is Empowered Shopper, which helps people get information about products they want to buy. You can also check out Eyes on the Dollar, which is a great blog that I co-own.

18 Comments

  1. February 9, 2014 at 10:38 am — Reply

    Great post Grayson. As you know that article didn’t sit right with me either an so I wrote my own post. Extra payments definitely reduce amortization length and they reduce interest costs, though not always the best financial decision in the long run. Jane and I have accelerated weekly payments and make extra principal payments weekly as we’ll. (but you already knew that). :)

    • Grayson Bell
      February 9, 2014 at 10:41 am — Reply

      Thanks Jack. I was happy to read your post. Though it might not be the best financial decision in the long run (entirely on interest rate), not everyone wants a mortgage and whatever they can do to reduce that length is good for them.

  2. February 9, 2014 at 11:36 am — Reply

    I saw the post too and didn’t think the numbers added up, but didn’t do the analysis, so thank for you doing the work Grayson! I just knew that personally we did this on a previous mortgage and it absolutely made a difference and in a relatively short period of time. If you plan to stay in your home for the duration of the mortgage, I think it’s a great strategy to utilize.

    • Grayson Bell
      February 10, 2014 at 10:14 am — Reply

      The numbers certainly don’t add up. Even if you broke down the specific math with just one extra payment at no interest, you get more.

  3. February 9, 2014 at 12:36 pm — Reply

    Ha – I saw the article but didn’t bother to read it because I knew by the title that it was a bunch of hooey. Thanks for setting the record straight, Grayson.

    • Grayson Bell
      February 10, 2014 at 10:15 am — Reply

      Haha, titles like that intrigue me, so I figured I would stop in and check. I don’t like when math is done wrong and then used to prove a point.

  4. February 9, 2014 at 1:52 pm — Reply

    Great post! The original post is dangerous because it makes people think that it is not worth paying extra on their mortgage even though in real life, it actually can make a large difference. Thanks for breaking it down and clarifying! I got the same answer when I prepared my own amortization table.

    • Grayson Bell
      February 9, 2014 at 9:38 pm — Reply

      Thank you Thias. I saw your comments on the post and I just don’t understand why she was so set on her math. I haven’t found any calculation that came to her same conclusion, so I am going to assume it is wrong until I see otherwise.

  5. February 9, 2014 at 6:19 pm — Reply

    I didn’t read the article, because I generally don’t go for articles that are so black and white. Like THIS WILL GET YOU NOWHERE or THE ONLY WAY TO BE SUCCESSFUL, blah blah. There are many different paths and I usually like to take my advice from real people rather than “experts”

    • Grayson Bell
      February 10, 2014 at 10:28 am — Reply

      Black and white articles are very hard to have the point come across. I try to write ones that show what I did and then say that you can do whatever. I wasn’t a fan of the article, but I am sure it brought in some good traffic for Modest Money.

  6. Peach
    February 10, 2014 at 4:17 am — Reply

    Bi-weekly payment is the same as in the semi-monthly payment but over one year you end up making 26 payments rather than 24 payments. It will save you a small amount of interest and if you can afford that little extra each year, it makes sense to choose an accelerated bi-weekly schedule.

    • Grayson Bell
      February 10, 2014 at 10:28 am — Reply

      You are correct Peach. It equals one extra payment per year.

  7. February 10, 2014 at 11:04 am — Reply

    Baa, even if it *only* saved you a year and a half….wouldn’t you still do it? I mean, if you see a dollar laying on the ground do you pick it up, or do you say, “It’s just a dollar” and leave it alone?

    • Grayson Bell
      February 10, 2014 at 11:58 am — Reply

      I certainly agree Travis. It is a year and a half, plus interest. I don’t understand why you wouldn’t. Yes, some choose to invest the money, but that all depends on your goals.

  8. Creative me
    February 10, 2014 at 4:18 pm — Reply

    I thought that was weird too. I just kept thinking…. “Whaaaaat?”
    Your math makes much more sense, and I know from experience it shortens the mortgage term making more payments. Excellerate the finish line even faster by making a bonus mortgage payment whenever you can! I have a small emergency fund, that I contribute to monthly. If I don’t spend it (yay no emergency) then I apply as much as I feel comfortable to my mortgage. The earlier in the mortgage term, the bigger the impact to interest saved!

    • Grayson Bell
      February 10, 2014 at 4:20 pm — Reply

      You were thinking that because the math was wrong. Your method is good and you will be happy when you are paying less in interest and have a shorter mortgage term. Nice work!

  9. February 10, 2014 at 9:43 pm — Reply

    We will be purchasing land and having a home built on it soon and we plan to pay cash outright, if for some reason we have to finance the property we will be putting all extra income towards that loan.

    • Grayson Bell
      February 10, 2014 at 11:42 pm — Reply

      That is good to hear that you can pay cash for it outright. I wish i was able to do that. Best of luck Marvin!

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