I received an interesting letter from my mortgage company this past week. In sum, they offered to pull money from my checking or savings account to pay for my mortgage. But, the twist to this service was that they offered to pull only half of my mortgage payment on a bi-weekly basis, which means that I would pay half of one full mortgage payment 26 times over the upcoming year. This option means that I'll pay down my principal almost seven years faster than I would if I paid my mortgage payment only once per month, or twelve times per year. How does this work? I'll explain...

Say that your mortgage is a fixed-rate 30-year loan at six percent interest, and that payment is $1,600 per month for the next thirty years. Maybe this amount includes your taxes and insurance, a smart way to go so you don't miss any payments. If your taxes and insurance come to about $400 per month, then your “true” house payment is about $1,200 per month. If you fit in this profile, then you owe close to $200,000 on your home.

If you continue to make one payment per month for those thirty years, your total really isn't $200,000. You'll end up paying, all total, $431,677 in interest and principal. Just think what you could do with over $231,677 that you will pay in interest. Seriously – that's almost another home!

Instead, you can add just a bit more to your principal each month to lower those interest payments. Say that you add just $100 more to your payment each month, and that additional money goes toward your principal. Instead of paying $431,677 over thirty years, you'll pay $382,538 through this “accelerated payment plan,” which means that you'll save $49,139 by paying only $1,200 more – just an extra payment – per year. But, there's a better way to save money on that mortgage...

What if you made a half-mortgage payment every other week? Let's begin with the original $1,200 after removing the tax and insurance costs. Every other week, you would make a payment of $600. By the end of the year, you will have made twenty-six payments – a total of one full payment more than you would if you made payments only once per month. This means that a full $1,200 would go toward your principal without blinking an eye.

With this bi-weekly accelerated mortgage payment plan, you would see a huge savings across the board, even in the first year. Here's a comparison on that $200,000 loan over one year:

Monthly Payment:  $1199.10     
Total Interest: $231,676.38        
Avg Interest each Month: $643.55

Bi-weekly Payment: $599.55     
Total Interest: $180,392.78        
Avg Interest each Bi-weekly Period: $230.68

At the end of the first year, with a standard monthly payment, you would owe $197,543.98 on your principal. With the bi-weekly payment option, you would owe $196,264.34 on your principal. That's a difference of $1,279.64. That means that you've saved more than you paid in extra payments (those last two $600 payments) by almost $80 – more than enough money for that mulch and grass seed you'll need for that new lawn.

The best part of this accelerated bi-weekly payment option is that your mortgage won't last thirty years. If you pay two extra half-payments per year, you can walk away mortgage free in your twenty-fifth year. That means you've saved – all total – $62,024.17 – almost $12,000 more than you would if you make extra payments per month as in the previous example. How can that be? With the extra payments, you're actually paying more on your interest every other week as well, which adds up over the long run.

But, be careful – make sure that you go through your original mortgage lender rather than a mortgage company that acts as an intermediary between you and your mortgage lender. If you go through an intermediary, problems may arise and you may be the last to know. The first hint of that problem will occur when you receive a phone call or letter from your mortgage lender, but not until after your payment is already overdue. Since you are responsible for the payment, you may end up digging into your savings, even though the mortgage company already has collected your funds. So, be careful – check with your original mortgage lender or company to be sure that all is well with your idea.

Also, if you want to use that interest payment as a tax deduction, then you don't want to be so quick to make those payments on principal. But, if you have other deductions that you can take (such as school loans, or business or medical expenses), then you might want to build some quick equity in your home. One good reason to do this is to build a solid financial base for when the housing market takes an upward swing in another year or four. By then, you'll be able to walk away with more cash in your pocket if you want to sell your home, which can translate to a larger down payment on a larger home in the future.

Check with your mortgage company/lender to see if they supply this optional payment plan. It works best if you have a fixed-rate mortgage, as fixed rate mortgages offer a stable interest rate and predictable monthly payment for the life of the loan. Additionally, make sure that you can add even more money to the principal if you desire without penalty. If so, then you may learn that you've discovered a nearly painless way to fast-track your home ownership.

By the way – this type of accelerated payment plan also works with school loans, credit card payments or anything else where you pay interest over a period of time. Who knew?

Until Later,
Linda Goin