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Occasionally a customer asks whether making half monthly payments instead of monthly payments will pay off their mortgage quicker. The answer is no. Let’s assume a 30-year loan. You will only save part of one month’s interest over the 30 years so it is probably not worth it and this is assuming that your bank will process your partial half month payments timely.
What the customer really wants to do is make bi-weekly payments. Assuming the bank has this program available, you simply divide your monthly mortgage payment in half and pay that amount every two weeks. At the end of the year, you have made 26 payments or 13 equivalent monthly payments. One more month of payments can make a dramatic difference.
This strategy is great if you get paid every two weeks so you match your mortgage payments and will effectively pay off your mortgage in 25 years versus 30 years. With a $200,000 mortgage and an interest rate of 5%, you would save $34,325.47 in interest over the life of the mortgage.
Another strategy is to make an extra mortgage payment every 12 months so you are effectively making 13 monthly payments a year. This would also accelerate your mortgage and effectively pay it off in 25+ years too.
The bottom line is that either option is a great tactic to pay off your mortgage early. But you need to make sure your bank allows these types of plans so your payments get applied properly.
With TValue, you can easily do “what if” calculations of these options by changing the compound method from monthly, to half month, to bi-weekly and see the impact of different payment schedules and the interest savings over time.
