The total interest you pay on a 30-year fixed rate mortgage (FRM) is typically greater than the actual amount of the loan. If you follow the payment schedule laid out by your lender, you could end up paying $256,035 in interest on a $200,000 30-year mortgage with a rate of 6.52%.
The faster you pay down the principal, the less interest you'll have to pay over the duration of the loan.
One way to accomplish this is to arrange to pay an amount equal to half of your monthly mortgage payment every two weeks. That makes for 26 half-mortgage payments a year, or the equivalent of paying 13 monthly mortgage payments instead of 12. That thirteenth payment acts as a double payment and goes towards paying down your principal.
The savings can really add up.
Take a look at the
at BankingMyWay.com to see how much quicker you can pay off your mortgage with biweekly payments, and how much interest you end up saving over the life of your loan. Just enter in the amount, interest rate and term of your loan, and the calculator crunches the number for you.
Based on the above $200,000 30-year FRM at 6.52%, making the biweekly payments could save you $59,138 in interest payments over the life of the loan. You'll also pay off the loan almost six years early.
Most lenders offer a biweekly option, but it will likely cost you. The one-time fee to set up the arrangement can cost upwards of a few hundred dollars, with additional smaller fees per year or per month totaling $50 to $60 per year. That could add up to nearly $1,500 in fees for a $59,138 interest savings.
That's not a bad return, except that you can basically achieve the same savings without incurring any of the fees.
The typical biweekly payment plan deposits the money into an account every two weeks, and at the end of the month, your mortgage lender withdraws an amount equal to one full monthly mortgage payment. The leftover money accumulates each month, and is put towards the principal at the end of the year -- an amount equivalent to a single monthly mortgage payment.
Your interest savings are based on that extra end-of-year payment, not on a biweekly recalculation of your compounding interest. (There are some biweekly plans that recalculate the interest based on each half-mortgage payment, but those require much more work on the part of the lender, and so the fees are much higher.)
If you want to avoid the fees, but achieve the same amount of savings, just add on one-twelfth of your mortgage payment to each month's payment, and you will accomplish the same end of year prepayment. Most lenders even have a line included in your mortgage payment voucher for additional payments that are put toward paying down your principal -- these are often labeled "principal curtailment."
The trouble is, not all consumers have the discipline to add on that extra amount each month.
If you want the savings but have difficulty taking the necessary steps yourself, you should contact your lender about a biweekly payment plan. Be sure to look closely at the fees they charge, and discuss options for automatic withdrawals from your bank account.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.