Simple Savings Sunday #10 – Extra Mortgage Payments
Welcome 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.
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?